India, a country of bottom-up investing

Authored by Raghvendra Nath, Managing Director, Ladderup Wealth Management Pvt. Ltd.

India is a land which demonstrates a variety of multitudes within its boundaries – be it in terms of culture, language, religion, history or even investment approaches. In a country as diverse and filled with contrasts as India, it becomes somewhat difficult to be an investor always capable of taking the right decision at the right time. In addition to its all-encompassing diversity, India is also a very large region, and it is important for investors to note that shifts at a macro level can have varying impacts on not just industries but on the stocks in each industry. In such a scenario, a bottom-up investing approach might be a better fit compared to the top-down approach. 

Detailing a Bottom-Up Approach 

Usually, the terms top-down and bottom-up approaches are used to refer to the fundamental analysis of stocks and their historic performance. Both approaches consist of several processes aimed at researching potential stock ideas and designing a portfolio tailored to meet your unique risk-reward equation. In the bottom-up approach, a strategy most suitable for a country like India, investors focus on the individual stocks they are interested in, instead of observing and analysing the macro perspective. Accordingly, the bottom-up approach to investing begins with the investor reviewing the fundamentals of the company they are interested in, such as the revenue, business model and market position of the services or products being sold by the brand. Further, investors also study details such as the brand’s relative position in the larger industry, its performance in comparison to its peers and competition, its potential for future growth, the quality of management and the company’s preparedness towards facing unprecedented circumstances.  

Following this stage, the investor moves up to analyse the next parameter, which is the sector that the target company belongs to. In this step, you should analyse the risks and opportunities inherent in the larger sector, to better understand the potential of the company. If the company’s fundamentals remain robust but the sector witnesses a downfall, then your investment could also experience consequent volatility. The third parameter involves the economic conditions of the country, in this case India, and then, the global economy, thus rounding off the bottom-up approach to investing.  

Why opt for this approach? 

The prime reason to choose a bottom-up approach in India is the length and breadth of the country, due to which macroeconomic triggers may affect sectors and particular stocks in unexpected and dissimilar ways. Further, this approach is better suited to the analysis of Mid-Cap and small cap stocks and enables investors to identify companies with the ability to beat the market, thus resulting in better returns.  

Evolution Over the Decades: 

In India, the bottom-up investing approach has evolved over several decades, propelled by factors such as the country's unique economic development path, the diverse business landscape, and the entrepreneurial spirit of its people. Unlike other emerging economies that have followed a path of export-oriented industrialization, India's economic growth has been driven by its domestic market, prompting the development of multitudes of fundamentally strong companies across different sectors, from consumer goods to IT services to pharmaceuticals. This diversity has created opportunities for investors to find companies with unique competitive advantages and growth prospects and an excellent instance here is that of consumer brands, which have experienced sustained growth on the back of the burgeoning middle class in India. If you, as an investor, pick a strong brand in this sector, and ensure that the sectoral and macro-economic trends are in its favour, it is highly likely that you could enjoy a winsome example of bottom-up approach.   

Entrepreneurship and Technology: 

The consistently growing technology sector in India is creating manifold opportunities for investors to find innovative and disruptive companies with strong growth potential, making a stronger case for the bottom-up approach to investing. Bringing in the support offered by a vibrant entrepreneurial ecosystem and India, with its long history of entrepreneurship, many successful business families dating back several generations and a thriving startup ecosystem becomes the epitome of a successful bottom-up approach model. 

Abundance of Data: 

India's penchant for the bottom-up investing approach is also supported by the availability of humongous amounts of research and analysis. The country boasts a fast-growing number of equity analysts who cover individual companies and sectors, thus fostering a vibrant and comprehensive research ecosystem capable of proffering all kinds of data required for bottom-up analysis. The strong network of investment advisors, financial planners, and wealth managers offering tailor-made solutions to individual investors is another factor which can boost the success ratio of the bottom-up approach in India.  

Favourable Regulations: 

For the bottom-up approach to be successful, the country requires a robust governance and regulatory model, and this has been provided by the Securities and Exchange Board of India, the capital markets regulator which has implemented several measures to promote transparency and protect the interests of investors. Accordingly, investors following the bottom-up approach can easily access key financial and operational information, such as Quarterly Results and corporate governance practices of listed companies, which can help significantly at zeroing in on the best possible stock picks. Separately, companies are also being strengthened, on a fundamental level, by SEBI’s insistence on enhanced corporate governance, which requires listed companies to have independent directors on their boards and prompts separation in the roles of chairman and CEO. These measures have helped to increase investor confidence in India's capital markets and have led to the development of a robust ecosystem of investors, analysts, and advisors, while also boosting the odds of success for a bottom-up approach to investing. 

Present Market Scenario: 

The current market condition is also more conducive to a bottom-up approach, considering the ongoing high-interest rate regime and quantitative tightening which is visible across global economies. In a scenario which is not favourable to bull rallies, the global markets are set to become narrow, making the bottom-up approach more relevant as strategic stocks will have the ability to outperform both the index and the market. And if you do manage to identify companies that are undervalued by the market and have strong fundamentals, then you could stand to witness unexpected gains. 

Considering the horde of factors supporting the bottom-up investment approach in India, we can safely conclude that domestic investors keen on availing of high returns can opt for this strategy and come out with flying colours. However, it is important to note that every investment approach comes with its own set of risks and therefore, it is advisable to seek sound financial advice before taking a plunge in the market.