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CIO’s Desk: The Sanctum World View

Sunil Sharma , Chief Investment Officer , Published May 6, 2016

We embark this week on a journey in a domestic landscape filled with promise alongside lurking global peril.

Has the world changed fundamentally? Is volatility the new norm? How does the global backdrop impact India? Where are opportunities for investors?

I share our investment worldview below. Let’s start with a word that’s extremely important to our view of the future.


As a result of data available from the growth paths followed by previous emerging economies, the broad brush strokes of India’s economic path start to come into focus.Studies on demographic spending patterns add further clarity.

India’s market cap is currently tiny relative to the developed world. Meanwhile, our population dwarfs European nation’s populations, and is almost four times larger than the U.S.

There is a strong likelihood that our market cap will converge towards the European nations and eventually the U.S.

We can similarly anticipate that the per capita income of India will converge towards global per capita income levels. India’s income growth will follow the path of previous emerging nations, as the nation moves up the value chain.

A Tipping Point & Sweet Spot

Recent studies by Dr. HomiKharas of the Brookings Institute conclude that the next two decades will see an additional three billion people entering the global middle class, coming almost exclusively from the emerging markets. Even more interesting is the notion of a “sweet spot”. This is the time when people start exiting from poverty and entering the lower middle class and start earning over $10 a day. Interestingly, the minimum pay scale for a government worker was upped last year to roughly this number.

The Economic Intelligence Unit estimates that India will hit its sweet spot in 2017.

We believe we are already witnessing the precursor to this forecast. India’s population appears to be on an aggressive albeit selective spending spree and we don’t think this fact is as commonly recognized as it should be. We’d point to the dramatic increase in the number of cars on the roads in all major metros, the packed flights, metros, railways, droves of business workers in hotels as well as anecdotes we’re hearing from some clients about improving activity etc. One could argue that certain pockets of India are buzzing with activity driven by predictable trends.

These are reliable insights based on past experience of what normally happens as individuals start entering their peak earning years and peak spending years. We are the world’s youngest major economy with a median population in the high 20s, and we’re about to reach a tipping point in 2017.

We imagine in coming years, a rapid and substantial rise in market capitalization, alongside a rise in per capita income and strong sustained, spending.

Active & Selective

As individuals, we overestimate the rate of change in the near term and underestimate change over the longer term. To test our hypothesis, let’s use a 15 year look forward period at the start of each decade over the past 100 years. In 1980, we were heading towards the collapse of communism, the fall of the Berlin Wall, regime change in India and an opening of the economy. In 1920, a massive bubble was followed by a long and painful depression. In 1990, the mobile phone, email and the Internet. In 2000, a real estate boom, a great recession and so on.

It’s clear that we’re living in a world with rapid and accelerating change, and boom bust cycles. Massive opportunities are available to the vigilant, patient and wise. Innovation and disruption must constantly be on one’s radar.Entire industries can be and are being disrupted,sometimes from competitors completely out of left field.Volatility and risk are part and parcel of this new world.

The market indices do not fully capture the economic activity that is occurring in some pockets of the economy. Certain sectors are perennial drags on the index. So the growth in some sectors is consistently offset by deterioration in other sectors. Our view is reinforced by the massive returns certain sectors have delivered, in stark contrast to the sustained capital destruction in others.

The economy and the market should not be looked at in toto; rather, a sectoral and industry focus and at times a company-specific perspective is far more effective.

So, two additional concepts for investment success in our investment world view emerge: Active Management & Selectivity.

Investment out performance in India has been and will continue to be a function of sector selectivity and portfolio concentration. We expect funds that benchmark the major indices and highly diversified portfolios to under perform selective, focused, actively managed portfolios.

Is Volatility the New Norm?

The four most dangerous words in an investor’s language are ‘this time is different’. We’ve seen the story play out before. We think markets are less volatile today than they were during the market crash of ’87, the Nasdaq bubble, the Asian Currency Crisis and the Great Depression.

What we believe has changed is that investors loss aversion has risen as a result of repeated bad experiences with the markets, bad advice being tendered and marketing efforts being launched at inopportune times.

The Road Ahead

Like we mentioned at the start of this article, the broad strokes of India’s future are largely visible already.

The sail boat and video on our website’s home page is symbolic of the journey ahead. Smart navigation, state of the art tools and wise stewardship will be required to navigate the global perils that stand between clients and their long term goals. When – and whether – your boat reaches its desired shores will be largely determined by the quality of the team you employ.

That brings the final,and arguably most important, concept in our world view to the fore: trusted, competent investment advice.

We are Sanctum Wealth and we look forward to serving you and being your most trusted wealth manager.