With regards to long term investments, it is crucial to invest wisely in those outlays which provide optimum risk component as well as promising returns in the investment horizon. One of the critical strategies to reduce the overall risk of the portfolio is with the help of ‘Sectoral Diversification’. It reduces the risk of your diversified portfolio by allocating funds in various asset classes at a very minimum cost. However, it is imperative to identify promising sectors by making some forward-looking estimates. Sectors such as mining and utility have shown slow growth in the past, whereas industries such as finance, transport, retail, aviation, agriculture are rapidly growing. Growing sectors are essential for safe and prolonged investments. However, it is furthermore crucial to understand the viability, sustainability, profitability and survival of a particular business because of the rapid change in technology, business dynamism and market conditions. Taking an example of Pharma sector was an underperforming sector since last 4-5 years. However, it has shifted gears recently and outperformed the broader markets in recent times. Change in the external environment affects the decision making and asset allocation of the investor.
Here are a few promising sectors to watch out for:
Information Technology (IT)
Without a doubt, India is moving towards becoming a digital economy. Being one of the fastest emerging sectors, IT has shown global reach, lower risk, high- quality infrastructure, and connectivity that contributes immensely to the Indian economy. Its growth is escalating due to components such as BPO and government initiatives such as Digital India, MeitY Startup Hub (MSH). With technical services coming into the mainstream, IT sector shows escalating growth potential for the long term investment. Further, most of the industries like shopping, education, health and fitness are moving online, leading to increased demand for the IT infrastructure.
India is one of the largest exporters of generic drugs, globally. The current health crisis has been a blessing in disguise for the pharma companies. The companies were under a long term bear market since 2014 and have recently bottomed out and entered a long-term potential bull market. The consumer expenditure on medicines for chronic diseases is projected to go higher, paving the way for investments in R&D by the companies. Besides programs for rural health, preventive vaccines, and mass checkups augur well for pharmaceutical companies. Amidst the pandemic situation, the market is going bullish on pharma and healthcare sector following the increase in demand for medicines and drugs. The current health crisis has put doubts in the minds of the people on personal hygiene and safety. There are more cautious and careful in their way of living, leading to more fear amongst individuals. Fear of death has always contributed to the success of the Pharma companies.
Fast Moving Consumer Goods (FMCG)
It is one of the most potent and defensive sectors serving essential items. It will always remain in business irrespective of the overall market condition, i.e. they have a constant demand, thereby providing consistent returns even if the economy faces historic low. These companies continue to deliver daily household items to an established consumer base. Being the fourth largest sector in the Indian economy, central initiatives like Food Security Bill, direct cash transfer subsidiaries support the growth of this sector. With the urban segment being a significant contributor to the volumes of such companies, there is a lot of unpenetrated potential in rural India.
India is one of the largest data consumers countries in the world, with the usage of a monthly average of 9.8GB per consumer and is expected to double by 2024. With a daily increase in subscriber base, app downloads, affordable tariffs, and broader availability, this sector shows exponential growth. It remains promising in the future as rural segment developments have also started. Work from home and increases usage of data amidst the COVID situation has benefited this sector. Telecom sector has recently seen some foreign direct investments from global giants like Facebook Amazon and Google, along with few of the top private equity players across the globe as well. To become a Digital Economy, Telecom Sector has to be one of the biggest beneficiaries in times to come. Telecom shows excellent prospects for a safe investment.
Non-Lending Financial Sector
The non-lending financial sector would include companies in the insurance, asset management and securities business. These businesses have a little penetration, i.e. lower customer outreach as compared to the overall population of India. With an increase in financial literacy programs in India, the demand for insurance products and new Demat accounts is bound to increase. Also, the overall change from a saving economy to an investing economy shall lead to higher participation from the retail population into the capital markets. Currently, a small percentage of the total population is investing in Mutual funds, and an even lower portion of the population has insurance as a risk cover. Therefore, there is a vast potential in the Indian markets, which is unpenetrated.
Argo-Chemical and fertilizer
Indian chemicals companies will benefit from the expanding speciality chemicals market globally led by manufacturing shifts from China following the outbreak of a virus. Countries across the globe are looking for an alternative to China to reduce its dependency on a single country. Indian companies could benefit from such a demand shift globally by capitalizing on the export of such chemicals.