Economic and business disruptions were the norm every 25 years. But, increasingly the frequency of these disruptions that create a new market and eventually disrupts an existing market have been rising. What took 20-30 years earlier to replace is taking 5-10 years today, thanks to technology. This means companies that relied on long-term economic moats and were entrenched players in tough-to-enter businesses are suddenly realising that they are vulnerable to upstarts. This has put investors in a quandary. If the business opportunity can vanish in 8-10 years, how do investors position their portfolios for the long-term? The only way is to identify business disruptions ahead of others and give your vote to the disruptor. This also means staying away from companies that are likely to be victims of disruption.
You have already seen the effect of disruptions right in front of your own eyes. Cassettes were replaced by floppies, which were outdone by CDs/DVDs and ultimately the ubiquitous pen drives have come out on top. Smartphones have almost replaced fixed landline businesses run by BSNL and MTNL. Newspapers are making way for digital platforms. Shopping in supermarkets and stores is finding a tough competitor in e-commerce. Government defence companies, which earlier got all government contracts, are slowly losing ground to private sector defence firms. Instead of buying cars, people are leasing them or using app cab services. Let us look at some disruptions and understand what you can do to ride them.
Financialisation of assets
Households and individuals are no longer keeping money in bank FDs, gold and real estate. They have warmed up to equities in a big way. Instead of leaving money in traditional alternatives, they are investing in market linked products that can deliver better than the inflation rate of returns. This financialisation of assets means that more and more money will be deployed in equity products. Not just that, even large institutions that earlier stuck to fixed income options are ready to take an equity bite.
To ride this disruption, investors should consider buying capital market businesses. So, investors should look at stocks of asset management firms, insurance companies with a larger share of equity linked business, broking houses that are digital ready and investment firms
Do remember, however, that any sharp drawdown in stock markets can cause many households to retract equity saving. Negative regulations can also impact financialisation of assets.
Disintegration of PSU lending
Look around you. PSU lenders are not the same trust-worthy businesses any longer. There is a marked change in how the society, investors and even their owner i.e. the government look at them. With large cost structures and deepening inefficiencies, PSU lending entities have faced huge troubles in their bread and butter business — lending. So, this disruption is favouring private sector lending and strong non-banking financial companies.
The weak state-owned banks are becoming less effective at competition. At the same time, the disruptors are gaining foothold due to access to technology, better credit appraisal and stronger management and governance. So, investors should gradually pare exposure to small and medium PSU lenders, and consider only the large ones. Consider hiking exposure to retail-focussed lenders who have a proven track record of wealth creation.
Do note that private sector lenders and NBFCs with strong parent support too can suffer the same lapses in risk management, including internet fraud and drop in lending standards that has affected PSU lenders.
E-commerce led retail
Unless it is festivals, consumers are opting for e-commerce whenever they have an opportunity to buy. Be it food, shopping, apparel, jewellery, electronics, and even medicines, e-commerce has become all-pervasive today. The shift in modern retail away from large format stores to 24X7X365 open e-commerce is a major disruption that has only started.
As e-commerce spreads its wings and becomes more entrenched in smaller cities and towns, there will be a transfer of income from retail store firms to e-commerce. This has huge implications. Brand-reliant consumer companies will find themselves increasingly going head-to-head with unbranded makers as e-commerce acts like an equaliser.
You may argue that there are not many e-commerce listed plays in India. But, the retail market shift would mean consumer firms are not going to be the yesteryear safe-havens that they once were. Richly valued stocks of consumer firms will face the heat as e-commerce spreads deep.
Kindly remember that government regulations can cause a slowdown in e-commerce penetration. This is a big risk to the e-commerce ecosystem growth.
As pollution in urban locations takes center-stage, authorities and stakeholders will look at addressing the situations. The three-point solution agenda to pollution menace lies in the usage of electric vehicles, shared mobility and autonomous vehicles. While the obsession for passenger vehicles is an important part of the pollution problem, it will take regulatory spine to address this problem.
Mass rapid transport infrastructure will be developed so as to reduce the need for personal mobility options. Mainstream adoption of electric vehicles will have to incentivised so that automakers go electric, and drop carbon fuel from their menu. This is going to be a major disruption, which will challenge the auto companies and auto ancillaries in a big way. The entities with an early mover advantage will benefit in a big way, as the world prepares for a green future.
A major risk to this green-earth theme is no regulatory response to pollution. If authorities and governments only engage in verbal promises and do not deliver on the ground, anti-pollution as a theme will achieve nothing for the investor.