COVID2019 and stock investing – Part 4 – is it a blessing in disguise for the Indian economy !

At first read, the presented arguments may sound counter intuitive. However, think carefully and you might agree.

This is my 4th post in the series.

  • The 1st post (given the steep decline in the markets) was focused on what one should be doing depending upon his own investing style.
  • The 2nd post focused on the key factors that would determine the path to the economic revival.
  • The 3rd post focused on how Covid2019 has presented an unique opportunity to gauge the management quality

(Links for the previous posts are provided at the end for the ease of the interested readers)

Now coming to the current post – following tweet of mine dated April 6, 20 provides the context !

Which are these two sectors? I have had numerous discussions during last 3-4 months with lot many people on this. Most people said – IT, Pharma, FMCG, Infrastructure and Financial Services.

I do understand and agree with the green shoots in most of these sectors (except financial services) but failed to understand how will they end up reviving the Indian economy (except maybe infra to an extent). (Do think and let me know in comments, for any counter arguments)

So which are these two sectors? As per me –

  • Auto; and
  • Real Estate

I thought so in April 20 and continue to believe so. Let me accept there are very limited people who agree with me on this – though on auto, gradually people have now started agreeing 🙂

Why Covid2019 will help reviving auto and real estate?

Auto – Over last couple of years owning a car/ motorcycle/ scooter had become a luxury and an avoidable expenditure due to the increasing usage of Ola/ Uber as well as improved public transportation e.g., metro. Economy in any case was struggling making people further contented with not buying their personal vehicle.

Covid2019 changed this.

  • During lock-down – when everything was shut people struggled to move around even for the basic necessities
  • After lock-down – no-one wants to use public transport due to fear of contacting virus

Owning a private vehicle has suddenly changed from being a luxury to a necessity.

Talk to anyone and you will realize this to be on the top of the list of almost everyone.

Infact, this seems to be going on another extreme now. People who were traditionally comfortable using public transport are now trying to buy their own vehicle – either through own savings or by pushing their employers to provide them with one… and this include people at the lowest income levels as well.

This, I believe bodes very well for the Indian economy – auto being a core sector.

Arguments against auto include – failing businesses, job losses and hence falling incomes and consequent impact on demand. I agree that this can play a role in slowing the pick up. However, virus has bought in a structural tailwind for the sector and hence put it back on track. This I believe shall do more good than bad as we move forward.

Rural economy is recovering well and government spending on infrastructure is bound to take off. Within private, selective segments like pharma, fmcg, IT etc is not a issue. So hopefully, the momentum in auto sector shall continue.

Real Estate – this is surely not as easily explainable as auto. One needs to look back more comprehensively.

I personally believe, struggling real estate has been one of the key reason for India’s under performing economy over the last 5-6 years.

The sector went out of favor vis-a-vis financial assets

There are varied reasons for that –

  • Preceding boom period for this sector from early 2000 to 2014-15 and consequent bubble
  • Bullishness towards overall economic revival once PM Modi came into power in 2014 and hence people’s preference for financial investments
  • PM Modi’s campaign against corruption and black money – something that is largely associated with this sector
  • Quality of promoters’ at large in this sector and hence waning public confidence
  • Struggling economy and increasing unemployment

However, whatever one might say, real estate is an extremely important sector for any economy

  • More than 100 industries are directly or indirectly linked with this sector e.g., cement, steel, cables, paint, switches, furniture etc etc etc
  • The sector is a significant employment generator
  • Most important – it has significant impact on consumer’s mindset, sentiment and hence spending behavior – think about someone whose lakhs are stuck in some property (either because property is unfinished or there is no buyer). How conservative or aggressive he would be on spending on other items?

Based on varied estimates, average of Rs 6 lakh crore of money is stuck in this sector. Actual might be much higher. This is significant amount and given this sector’s linkages with so many other industries does have a direct impact on those as well.

So am I here trying to be a proponent of bubble prices, corruption, inefficiencies in the real estate sector… where did I imply that?… not at all.

But yes, I am not a proponent of extremes or instability and that too in a sector as critical as real estate.

Builders don’t operate in silo. This is a sector that has close linkages with governance at every stage in the form of plethora of approvals that are needed.

So how will Covid2019 result in real estate revival?

It started under performing when it went out of favor and will gradually start picking up as people start looking at it back

Reasons –

  • Poor returns on financial assets over last 5-6 years – Before Covid2019, episodes like ILFS, Yes Bank, DHFL and Franklin Templeton had resulted in sufficient doubts over debt instruments, mutual funds and bank deposits. Even midcap equity was bleeding since January 2018. Then Covid2019 led decline in equity markets during Feb-Mar 20 was such steep that I believe would have made many people question the long term viability of investing ‘only’ into the financial assets !

How many people have you come across who have made money through debt, equity or mutual funds in the last 5-6 years. Infact, now many don’t even consider bank deposits to be safe.

  • Traditionally people have generated significant wealth thru real estate – this is a fact. All of us might not know many successful financial investors but all of us would know many people who have built their wealth thru real estate over years and across generations.
  • Real estate is relatively clean vis-a-vis 5-6 years back – RERA has been implemented, consolidation is happening, institutional money has become cautious and ready inventory is available. This along with builders’ openness towards price negotiations bodes well for the serious buyers.

What I expect is not a bubble but a hope that money will gradually start finding it’s way towards real estate that in turn will help in starting the wheel that has been stuck for long. This in turn will help relieving the pressures from the financial system, help reviving multiple industries, generate significant employment, help completion of projects that were stuck and bring smile to the faces of public at large.

People most of the time forget that GDP, financial markets and real estate are directly linked and none can move in isolation for extended periods !

“India’s economy needs a way out of short boom-and-bust cycles”

A headline that for me best describes India over the last 20 years. With pharma reviving, infra bound to, manufacturing getting a push with atmanirbhar bharat, IT, FMCG sailing and if I am proven correct with auto and real estate joining in, maybe we would get into an era for India that all of us have been waiting for long now !

(P.S. Note: Intentionally didn’t mention financial sector as that for me is derivative. If capital intensive sectors will do well, there is no way that financial sector will lag behind. Infact, it will lead from the front.)

Links of previous articles –

– COVID2019 and stock investing – Part 1 – quarantine your strategy

– COVID2019 and stock investing – Part 2 – Critical factors that you must consider

COVID2019 and stock investing – Part 3 – Wonderful opportunity to gauge management quality

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