When the economy contracts, most countries following the Keynesian economic theory invest big in building infrastructure to boost the sagging economies. Indian government has clearly stated its goal of spending hugely into infrastructure before COVID-19, during its budget presentation. Post COVID-19, it has become almost imperative that the government will fire all its guns to kick start the economy to take advantage of emerging opportunities as a result of growing dislike for China in major economies. Before we delve deep into the possible sectors that could benefit with this spending spree, let us consider some facts.
HOW GOVERNMENTS REACTED PREVIOUSLY:
After the great recession in the 30’s, US spent over 10% of its GDP on infrastructure, which was a paltry 3% in 1929 before the great recession. After the 2008 crisis, US resorted to QE and provided almost cost-free funds to ailing financial institutions, which otherwise could have crippled the economy. Recovery after 1933 and bounce back after 2009 are there for anyone to see and conclude that government actions were justified. When governments spend money on infrastructure assets, the wheels of economy begin to move on and gather pace.
But unlike US, where manpower is scarce and expensive, India suffers from large scale unemployment when the economy flounders. Government will have to balance between moving the economy while taking steps to bring unemployment rate down faster. In order to address the rising likelihood of social unrest because of Lockdown and migrant labor issues, Government will work hard on sectors that create immediate employment as well as those that augur well for the well-being of the country. In this backdrop, it is worthwhile to look at the sectors that meet the twin goals of economic recovery and job creation, at the same time.
SECTORS THAT THE GOVERNMENT WILL FOCUS ON:
For continued food security to 1.37 billion people, agriculture will be the focus and it works to provide employment to 43% of the 487 million work force. Next on priority should be construction that will directly absorb 15% of the working class. Once the employable opportunities are created, consumption will pick up and the industries providing goods and services will do very well. However, unless an effective vaccine is invented and introduced quickly, a few industries will be set to suffer the most. Automobiles, Airlines, Travels & tours, Hotel and hospitality are a few of them.
To kick start the economy, government will have to invest heavily in infrastructure projects. Since many contractors have large outstanding dues from governments on stalled projects or in arbitration awards, many may not be keen to participate in this exercise, unless open issues are resolved. Discoms in India owe approximately 83,000 crores to power producers and another 80,000 crores are due from Highway authority to contractors. If these dues are settled, private participation in infrastructure build-up will gather pace and capital investment cycle will begin. Needless to say, that heightened economic activity will bring cheers to financial sector and well managed stocks will recover their lost ground very quickly. If government announces mega plans to build infrastructure and follow them up with right processes, there is bound to be global interest in India story. This, in turn, will lead to brisk pickup in economic activity paving way for capital flows from world over.
WHAT YOU CAN DO TO TAKE ADVANTAGE:
Government appears to have been left with a few choices at this time. When these things happen or indications of happening are felt, capital markets will rejoice and will become a leading indicator of changing fortunes of Indian corporates. What sectors will gain in such a situation is something one has to be very careful about.
We have built some baskets that are offered as defensive bets to work even in situations of continuing COVID-19 crisis. They are suitable for people seeking more safety on their investments and are reluctant to see drastic drop in their investments, if solution to COVID-19 takes a while longer.
We are also ready with some baskets that are meant for investors who buy our line of thought and are prepared to wait for longer periods, if necessary, to see some solid growth on their investments. These baskets will be termed Aggressive and will consist of sectors that are set to participate in eventual recovery. However, to become potential multi-baggers, Midcap stocks from those segments are grouped together. We strongly recommend investing in at least 4 such baskets as prudent diversification.
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