The best investment strategies during the new capex cycle.
After a recent election, it’s important for investors to grasp the economic plans of the new government and how they will impact the economy and market.
Investors must recognize that patience is a crucial trait, especially during uncertain and volatile market conditions. My 29 years of experience in this field have taught me the importance of patience. With a new government in power post-election, it is essential for investors to grasp the economic agenda and its impact on the market.
Let’s delve into what awaits us, retail investors.
CONTINUITY OF POLICY REFORMS
Over the last ten years, the government has implemented various policy changes. These range from reducing corporate tax rates to introducing the Production Linked Incentive scheme. Additionally, formalizing the economy through the GST law, allowing retirement funds to invest in stocks, implementing the bankruptcy code, and RERA have all played a role. These reforms have encouraged investment-driven growth. We anticipate more reforms in the next five years, indicating positive structural changes. The government is likely to focus on fiscal consolidation, infrastructure spending to reduce logistical costs, supporting specific manufacturing sectors, signing free trade agreements with major economies, emphasizing energy transition, and increasing spending on social infrastructure.
MACRO STABILITY
Over the past decade, the government has been focusing on macro stability. We are confident that this focus will persist. The goal is to maintain inflation at around 4 percent, with a 2 percent margin on either side. Headline inflation is expected to decrease to 4.5 percent in FY25 from 5.4 percent in FY2024.
Fiscal consolidation is a key objective, with a fiscal deficit target of 4.5 percent of GDP by FY26, down from 5.6 percent in FY24. With a current account deficit below 2 percent and forex reserves exceeding $600 billion, the Indian rupee is expected to remain stable. These factors have contributed to India’s status as the fastest-growing large economy and are likely to sustain growth above 6 percent in the coming years.
CAPEX CYCLE
Private investment is starting to show early signs of improvement after a period of weakness over the past decade. The combination of supply-side reforms, increased capacity utilization, and strong corporate and financial sector balance sheets are expected to pave the way for a rise in investment. The manufacturing sector’s contribution to GDP is projected to increase from 14 percent to over 20 percent by 2030, driven by government policies, changes in global supply chains, and trade agreements. Household investment, which makes up 37 percent of total investment, is anticipated to benefit from a rebound in real estate sentiment in both residential and commercial sectors.
ENERGY TRANSITION
The Indian economy has faced challenges in the past due to its heavy reliance on imported energy sources like oil and coal. When global prices for these resources increase, it affects India’s current account deficit, leading to a greater dependence on foreign investments to balance payments. As the country transitions towards renewable energy from fossil fuels, we can anticipate significant advancements in this area. Presently, 72 percent of energy is derived from coal and oil, but this is projected to decrease to 58 percent by 2034. This shift will not only aid in reducing pollution but also cater to the rising energy demands as the economy expands rapidly.
The markets might stabilize while waiting for more information on the government’s future policies. The upcoming union budget will provide some insight. Considering the economic factors at play, we see this as a chance to boost equity investments for the long term.
