Spark Asia's Krishnan says these three sectors have come to life after 15 years

P Krishnan- MD Spark Asia Impact Managers Pvt Ltd

India’s growth story is on a sustainable and stable track and that should persist for 4-5 years; 6.5 percent GDP growth looks achievable over a longer period and most analyses do not fully factor in the impact of steady and persistent growth, says Parameswara Iyer Krishnan. Better known as P Krishnan, he is the Managing Director and Chief Investment Officer of Spark Asia Impact Managers, a portfolio management service provider based in Chennai.

India’s growth is led by the core sectors of the Indian economy and is more balanced than it was in the decade before Covid, says Krishnan. More importantly, the growth is being led by investments and not just by consumption, he added.

Krishnan, who has worked as an investment manager in various Indian as well as foreign asset management outfits since 1990, expects strong, unprecedented capital flows to provide tailwinds. The inflation differential between India and the US is at the most favourable level for India in over 40 years, he added. This, coupled with a world hungry for growth levers, will see capital flows accelerate, said Krishnan.

Edited excerpts from an interview with Moneycontrol follow:

With benchmark indices scaling new highs by the day, what are the risks and opportunities in Indian markets?

The opportunities come from the fact that we expect the market to start factoring in the prospects of steady growth beyond FY24. With the rally so far, FY24 seems to be largely in the price. Overall, while the Nifty is at a new high, it is under 10 percent higher than October 2021. Moreover, the rally is being driven by segments of the market that did not do much after the global financial crisis (GFC). The internals of the rally are consistent with what we see panning out for the economy. Having said that, the market is up by over 13 percent FYTD. Any move of this magnitude in a short period merits a bit of caution. Investors should not ignore risks, including headwinds from IT services, the uneven growth appetite of the Indian consumer, expensive valuations at one end of the market, global factors, and finally, general elections.

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What’s your assessment of emerging markets in terms of the macro level and prospects? Where does India stand? How can it benefit from China plus one (a business strategy to avoid investing only in China)?

Except for India and China, most emerging markets do not have autonomous growth drivers. China has possibly entered a lower growth phase and may not be able to beat that trend. We do not regard emerging markets as an appropriate reference point for India from here on. India will benefit as it has negotiated the Covid shock and recession better than other EMs and even much of the developed world. On China plus one, there will be competition in specific segments from other countries. At a big picture level, India has many advantages not just as a sourcing base; India is also a destination as it is a vast market for the goods it is exporting.

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Which are the under-rated sectors that you see playing well?

While it is hard to generalise and opportunities will depend on the case, the following sectors/segments look promising — they missed the decade-and-a-half after the GFC. One: Real estate — domestic housing is likely to be a multi-year opportunity, and here, we expect stability in land prices as a major driver as that will make housing affordable. Two: PSU banks. The credit cycle is benign and there is no reason to worry about incipient trouble spots as yet. These stocks are under-valued. Three: Companies that benefit from the growth in core India, whether they are in manufacturing or in the infrastructure/capital goods segment.

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Retail investors are finding the small cap space attractive of late and have poured a sizeable amount of money into direct equities and smallcap mutual funds. The respective indices, too, touched fresh record highs recently. What is your take on the smallcap space in the next 6-12 months?

One should stay very selective. It is erroneous to conclude that small caps are attractively valued as an asset class. The small cap index is the wrong index to track other than to gauge sentiment, as it is too fragmented to analyse in totality. As an asset class, small caps are a high beta play on growth and in that sense, the rally is understandable. However, good quality names are not necessarily well-supported on valuations across the board. Small caps come with an inherently higher risk and in euphoric times, that is forgotten quite easily. We prefer a more flexible and open-minded approach to investments — more of a market cap agnostic approach based on the merits.

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Which are the other asset classes that are likely to do well?

For retail investors with a long-term horizon of over five years, equities are by far the best bet. The next alternative probably comes in so far behind that the same should be used only for tax planning and diversification (PPF, NPS, etc). Fixed income options offer hardly any room to beat inflation after taxes and are not even completely risk-free. We do not have a view on asset classes such as gold. US equities (particularly the US technology sector) can be a good diversification option but the cost of access is high and timing matters.

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