Dear Reader,
Goldman Sachs has a new report titled ‘The Rise of Affluent India’, in which it says, “Only ~4 percent of India’s working age population has a per capita income of over $10,000, projecting to ~60 mn consumers… we estimate that this consumer cohort has grown at a 2019-23 CAGR of over 12 percent, compared to ~1 percent CAGR of India’s population. If the current trajectory continues, we expect ‘Affluent India’ will grow to ~100 mn consumers by 2027.”
Affluent Indians, according to the Goldman Sachs trajectory, are those earning more than $10,000 per annum. The report goes on to say, “The largest beneficiaries of rising ‘Affluent India’ are categories such as leisure, jewellery, out-of-home food and healthcare, and premium brands within all categories.” That fits in with the premiumisation narrative, which we said is sweeping even small town India.
But there’s one premium category that Goldman Sachs seems to have missed --- stocks. In 2022, international management consulting firm Oliver Wyman came out with a series of ‘White Papers’ offering what it said was “A radical new perspective on equity prices and the dynamics of wealth accumulation”. One of these new perspectives was to think of equities as high-end consumer goods. As a nation develops economically and incomes rise, more and more people find that they can save some money. Many of them have no problem stomaching the higher volatility that equities have. Consider the steadily rising SIP inflows that we have been seeing for some time. In other words, demand for equities goes up at the margin as a country develops.
On the other hand, the Oliver Wyman paper says the supply of fresh equity, which happens when new issues are made, hasn’t kept up with the rise in incomes. The upshot: a secular rise in prices in the equity market. Small wonder then, with all that money coming in, the market wants to go up all the time. As someone said, sentiment is just another name for the weight of money.
Add to the rise in incomes other reasons for increased demand for stocks, such as ease of transactions, lowering of transaction costs and the higher allocation to equities in pension and provident funds, all of which serve to direct fresh money to equities. Note also that supply in the bond markets has been much higher, with governments being a big supplier of paper.
Another big reason cited by Oliver Wyman for the rise in equity prices is inequality. If the rise in national income were to be equally distributed, it would lead to inflation in goods and services, as the masses would spend their money on them. But the rich have seen a far higher increase in incomes than the poor. And since the affluent have a lower propensity to consume, their savings have resulted in asset price inflation. One of the reasons for the recent rise in goods and services inflation in the West was the income support that their governments doled out so generously during the pandemic.
Asset price inflation also feeds inequality, as it is the affluent who benefit the most from higher stock prices. This in turn gives rise to the wealth effect and further investment in assets and another round of asset price increases, in a circle that is virtuous or vicious depending on where you stand in the income pyramid. As a note by the St Louis Fed pointed out for the US: “The Congressional Budget Office estimated that between 1979 and 2011: Market income grew an average of 16 percent in the bottom four quintiles. It grew 56 percent for the 81st through 99th percentiles. However, it grew 174 percent for the top 1 percent.”
Oliver Wyman’s conclusion: “Thus, the secular bull market that started in 1982 has been the direct consequence of strong demand growth fuelled by ballooning income inequality, among other factors, combined with supply that has not kept up.’’ Of course, there are other factors too, lower interest rates being a major one. It led to the financialisation of the developed economies and to much higher levels of leverage, while the computing revolution led to all sorts of novel financial products. Taken together, they led to the Global Financial Crisis of 2008. But that also led to another kind of learning — that central banks had the power to make sure, by an endless supply of liquidity, that markets continued to rise.
To be sure, markets will be buffeted by all kinds of forces that change the environment for equities — the Great Depression, the Japanese bubble, World Wars and the huge gulf between China’s stupendous economic success and the pathetic performance of its stock market are shining examples of the perils of becoming too complacent about the long-term bullish trend in equities.
The Goldman Sachs paper says, “In the past 12 months, our ‘Affluent India’ list of stocks has seen 7 percent upgrade in FY24 consensus revenue estimates, vs 3 percent downgrade for the broad-based consumption names.” That outperformance should hold true for equities too, as high-end consumption goods. Moreover, there’s one aspect in which equities are different — unlike goods and services, higher prices lead to more buying in equities.
In the long run then, inequality is a big factor driving stock prices. And since there is nothing in recent politics that signals that inequality is going to ebb, stock prices too should remain high. Of course, it’s true that, as Shakespeare said, “There are many things in heaven and earth, Horatio, than are dreamt of in your philosophy.” Just before the bubble burst on Wall Street in 1929, economist Irving Fisher wrote, “Stock prices have reached what looks like a permanently high plateau”, a sentence that has earned him undying notoriety.
John Maynard Keynes’s quote “In the long run, we are all dead’’, is often taken as a clever take on the future. But what he actually said was, “The long run is a misleading guide to current affairs. In the long run, we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.” That is why we have, in our articles listed below, tried our best to help you, as investors, generate alpha, while leaving you with the comforting thought that the market has your back in the long run.
Cheers,
Manas Chakravarty
Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
Stocks
Discovery series—Shivalik Bimetal Controls, Titan, Persistent Systems, Jyoti CNC Automation IPO,
GM Breweries, Discovery—Sky Gold, Aarti Industries, SBI Life Insurance, Saregama, TCS, Infosys, Weekly tactical pick, Delta Corp
Markets
Bitcoin is here to stay, India should join the party
Rate cuts in 2024 would be a mistake, believes this market veteran
Will Q3 earnings provide a reality check or cheer investors further?
Sebi short-selling norms to have no impact on markets
Why short-sellers are a boon and not a bane for markets
India's higher rankings in MSCI EM index could import volatility
Foreign investors to drive Indian equities in 2024
Companies and sectors
Will banks face margin pressures?
BYD’s battle with Tesla offers a glimpse of the EV market’s future
The first half of 2024 will be crucial for the financial sector
Deposits, margins to keep banks busy in 2024
Financial Times
Reasons to be optimistic in 2024—despite everything
Content creators fight back against AI
The EU’s carbon border tax and the fragmentation of global trade
Strong gains by newly listed stocks raise hopes of IPO market revival
Japan’s market rally lacks solid backing
Inside Edge
Calculator dumps Polycab, Desi Soros switches on Zee, Diamond in the rough
Name lending gathers steam, cracking the index inclusion exam, kerb deals in a new avatar
Can fallen angel Walchandnagar fly again? Silent’s spiritual break, small MFs in focus
Budget 2024
Will it be a populist pre-election budget?
Look beyond sops to energise RE growth
Off-radar agrochem may take centre-stage
Will the FM build a case for a lower tariff regime?
Waiting for a rural demand revival, is a stimulus on the cards?
How does India’s government debt compare to its peers?
Benign raw material prices to keep fertiliser subsidy bill in check
Higher employers’ NPS contribution limit, tax-free annuity income on the wish-list
More misses than hits in disinvestment target
Can Budget 2024 lift demand for affordable housing?
Corporate capex share drops to decadal low
It's time life insurers were weaned away completely from tax crutches
Catalysing start-ups growth and investment
Healthy banks make for a wealthy government
How Indian Railways smartly improved passenger revenues
Geopolitics and Geoeconomics
Red Sea attacks have started to hurt
The Eastern Window: Bangladeshi voters express dissent with low turnout
Marketing Musings: Lakshadweep’s natural beauty needs to be marketed well to become an alternative to Maldives
Economy
Indian economy to grow by a stunning 7.3 percent in FY24, but K-shaped growth persists
After 10 years of reforms, how has the economy's structure changed?
Will India’s dreams in semiconductors come to fruition?
Sugar bends down global food inflation curve
India-US TPF must take steps that yield quick results
Pro Economic Tracker
India’s cold chain infra needs to grow swiftly to smoothen food inflation
Why PepsiCo’s patent win is no small potatoes
Time for a second green revolution, this time a sustainable one
Tech & Startups
What are the government's AI Centres of Excellence, and what will the three of them do?
Personal Finance
Multi-asset funds: Don’t blindly buy the story
How rich young Indians can write an effective, fool-proof Will
Why Axis Mutual Fund CEO B Gopkumar is confident of its turnaround by June 2024
Will maverick mid-cap fund manager Kenneth Andrade do an encore with Old Bridge MF?
Here’s how to build your credit score wisely
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