Saurabh Mukherjea Cautions Against This High-GDP Growth Investing Trap
The second Covid-19 wave has subsided and the economic growth is expected to pick up because of pent-up demand and fiscal stimulus. Saurabh Mukherjea advises Indian investors to be wary of the tendency to stick to certain development-centered sectors in such situations.
“The temptation in a period of rising GDP growth in our country is to buy steel, construction, real estate, cement, metals and mining stocks,” said Mukherjea. Investors, he said, need to watch out for this reaction because global inflation is roaring as well.
It will probably be the strongest year of GDP growth in nearly 16 years for major economies, but that will be coupled with high inflation, according to Mukherjea. For him, picking strong franchisees that have "enormous pricing power" is the key.
“If people get carried away by the recovery and don’t invest in companies with a strong pricing power, then commodity cost inflation will wipe out the benefits of a strong top line growth,” he told BloombergQuint's Niraj Shah in an interview.
In general, Mukherjea said, investing in new India now translates to betting on companies that have fundamentals in science, technology or intellectual properties, rather than the old style of going heavy on cement, construction, real estate, steel stocks. “These stocks have their own play, but you and I are not going to make a lot of money investing in them.”
The world of investing that lies ahead of us is a world where regardless of market capitalisation, investors pile in on companies whose brains and technology allow us to benefit from the next 10 years.Saurabh Mukherjea
Mukherjea isn't worried about the impact of the U.S. Federal Reserve’s hikes or tapers on stocks. “It’s normal that when the economy begins normalising, regardless of what the Fed or the RBI does, bond markets themselves start raising the cost of money and bull markets continue to be driven by economic growth," he said. "This has happened twice in the last 20 years and it won’t be different this time,” he said, citing the 2004-07 and 2014-19 periods when the Fed hiked rates amid "great bull markets".
A Post-Covid Bet
An interesting sector to bet on in the post-Covid world in India is specialty chemicals, according to Mukherjea. “India looks like becoming the world’s specialty chemicals hub over the next 10 years, after having already become the pharma hub," he said. "Western chemical companies don’t want to produce there because of environmental reasons. They had put their focus entirely on China, but after the Wuhan scare, they are now diversifying that exposure to India.”
Mukherjea has built in companies like Alkyl Amines Ltd. and GMM Pfaudler Ltd. into his funds. “What happened in the IT story over the last 30 years is highly likely to replicate to specialty chemicals too."
Watch the full interview here: