Saturday, April 21, 2012

Changing trends in investing

Which sectors occupy the maximum newsprint and mindshare amongst analysts and investors? Rewind two to three decades back. The likes of ACC, Reliance, Century Textiles, Grasim and BILT fitted the bill in the 1980s. These manufacturers of commodities were amongst the first to cash in on India's industrial revolution. They were the first to bring in sophisticated technology used for manufacturing processes. However, as competition intensified and there was loss of pricing power, growth subsided. With that even their market caps mellowed down. Software developers and financial institutions led the phoenix- like rise of service sector firms in the 1990s. They not only made processes cheaper and faster but also ensured efficient use of capital. They were the next to be crowned as fastest growing blue chips.

Coming to present scenario, the focus of governments around the world is to correct what has gone wrong. Environment degradation, loss of jobs, poor quality education, expensive healthcare and monopolistic pricing are issues being addressed. The outcome being the popularity of green energy, educational ventures, generic drugs and online retailing amongst entrepreneurs. Not just the developed world, but even emerging economies have their eyes set on these potential sunrise sectors. Meanwhile it is time for growth in the software and financial behemoths to tread back to the mean. In fact as per an article in Ritholtz, sectors like print media, hardware manufacturing, apparel manufacturing etc have completely lost flavor in the US. Thus it will not be long before investors too look for more lucrative options in sectors that have far better growth prospects.

According to us, investors should always look for businesses that have a strong and sustainable economic moat. The same again depends on demographic and socio economic needs. Clean energy is a must have. Thus the earliest players in this segment can have huge advantages. Quality education has commanded the attention of not just President Obama but also policy makers in India. Investments in this sector are therefore bound to get government support. India already has an edge in low cost generic drug manufacturing. Strong tie ups with MNC pharma can ensure better R&D and exhaustive marketing in developed economies. The demand for affordable healthcare too is no longer restricted to the developing world. But austerity measures have forced government and pharma companies to look for low cost drugs. Finally, the manufacturing of commodities like apparels and hardware will keep shifting to the destinations offering cheapest labour. India and China are set to lose their status as back office and factories of the world respectively. Hence the focus will shift to value addition and online retailing. For this is where the margin upside would be higher. Companies effectively and profitably catering to these niche segments are ones to watch out for! They are likely to enjoy the biggest economic moats in the near future. Undoubtedly investors can hope to find some of their best performing stocks amongst these sectors.

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