Key Areas foreseen to capitalize

Healthcare, education, finance, telecoms and real estate hitherto not in the lime light has caught attention of the concerned and now considered as key areas global companies are planning to capitalize the opportunities in these areas.
For instance, Global investment bank HSBC is of the view that one of the best ways to capitalize on the growth in India is through the somewhat under recognized consumption story. It is bullish on sectors like healthcare, education, finance, telecoms and real estate, and says that the outlook for these sectors over the next few years is remarkable.

It is considered that jitters about the economic outlook and volatility in global markets are likely to continue for a while.

Investors have tended to focus on infrastructure plays in India, particularly over the past year. In a way, that is not surprising since investment has been growing at around 15% a year, compared to 6 to 7% for consumption. The strong capex cycle may be coming to an end, whereas consumption growth should be more reliable.

Investment banks have an overweight rating on stocks like Pantaloon, Hero Honda, Maruti, Bharti Airtel, Reliance Communication, TV 18 and HT Media. China’s consumption story seems much better known than India’s opine experts.

India’s case is stronger because valuation of the overall Chinese market has just overtaken those for India for the first time in this bull market. In India, the above mentioned sectors are not generally cheap, but strong growth prospects justify premium valuations. Debate continues on how resilient India would be in the event of a severe US slowdown. Our feeling is that, with exports only 22% of GDP, India would be relatively unaffected compared to other Asian economies including even China.

This year 2007, average household income growth in India will accelerate from 3.6% a year over the past 20 years to 5.3% over the period 2005-2025. As a result, the ‘middle class’ (which can be defined as those with annual household income between Rs 1-10 lakh) will grow from 13 million households (50 million people) to 128 million households (583 million people) that is 41% of the population by 2025. The rich will grow from 1.2 million households to 9.5 million. As a result of these shifts, aggregate consumption by the middle and upper classes will continue to grow.

Projections of this sort should be taken with a pinch of salt. But a combination of demographics and economic catch-up means that, even if the exact quantum is wrong, the overall story in the absence of a major change in India’s and the world’s economic fortune is hard to dispute.

The global economic situation at the beginning of 2006 remained full of uncertainties. Improved corporate finances and stock market gains seemed to point to a long-awaited recovery in investment in Europe, but private consumption remained fragile.

The global trading system was in a period of transition, and the best way to handle it would be to conclude free trade negotiations by the WTO members. In such a climate of uncertainty, WTO member governments must strengthen the global trading system by making it more equitable and relevant.

World trade, as measured by merchandise exports, had grown by an exceptional 9% in 2004 but slowed to about 6% in real terms last year, reflecting weaker global economic growth in the period.

But the note also cautions about the possible snags with the Indian consumer potential both short and long term. Savings rates could continue to rise, as mentioned above, meaning that little of the increase in household income finds its way into additional discretionary spending.

In the near term, the rise in interest costs could dampen consumption. That has been seen in the automobile market where sales growth, which had been more than 20% this time last year, has turned negative.