In an interview with ETMarkets, Shah said: “The weakening of the US dollar, which in turn drives demand for alternative asset classes, could be a major factor impacting commodity prices.”
You mentioned that creating alternative supply chains is a multi-year, multi-sector megatrend. Can you explain the key drivers behind this shift and why it is becoming increasingly important for global companies?
Global purchasing managers have been trying to reduce the risks of sourcing from China for years. They have been working on this, but post-COVID and due to recent geopolitical challenges, this trend has accelerated.
Purchasing managers are no longer just looking for suppliers with the lowest costs; they also want reliability and continuity in the face of a challenging global environment that could arise from various external factors.
The Indian market initially reacted sharply to China’s stimulus measures and geopolitical concerns. What is your perspective on the Indian markets after the recent rally that pushed the Sensex to 85,000 and the Nifty 50 to 26,000?
In recent months, Indian markets have risen significantly with most indices (large cap, mid cap and small cap) up 15% to 20% in the last four months and almost 30% to 50% in the last four months . twelve months. Therefore, some consolidation (correction) was expected.
While Chinese markets are expected to be attractively valued, potentially diverting some of the foreign flows away from India, it is crucial to note that the main driver of Indian equities over the past three to four years has been domestic flows from investment funds, insurance companies and other investment funds. and direct investments by HNIs and family offices, rather than foreign inflows. In CY21, FIIs were net buyers of around $1 billion, yet Indian equities still rose 30% to 50%. In CY22, as US and global yields rose, FIIs were net sellers of over $16 billion, while DIIs were net buyers of $36 billion, and Indian equities ended on a positive note, significantly outperforming the US and other developed markets. India’s overall GDP has shown strong growth over the past three to four years.
India appears well positioned to benefit from this global supply chain realignment. What factors do you think have contributed to India and its companies gaining a ‘right to win’ in sectors such as pharmaceuticals, specialty chemicals, automotive and allied industries?
Indian companies have established the right to win by exploiting opportunities in at least six to seven manufacturing industries, including pharmaceuticals (CDMO & CRAMS), specialty chemicals, automotive and accessories, electronic manufacturing, engineering, energy equipment, textiles and more.
What was a potential for India for many years is now becoming a reality, with inquiries turning into substantial order books to be fulfilled in the coming years.
Indian companies in these sectors have demonstrated domain expertise and the scale to meet global demand while respecting intellectual property rights better than their counterparts in neighboring countries.
Moreover, government policies such as PLI (Production Linked Incentives) and tax incentives for new manufacturing units (with an income tax rate of only 15% for an initial period) have also acted as a catalyst.
You highlighted the pharmaceutical sector (CDMO & CRAMS) and Specialty Chemicals as two sectors benefiting from this trend. What specific strengths do Indian companies offer in these sectors that make them attractive partners in the global supply chain?
Indian chemists and their skills are recognized globally, supported by an abundant talent pool with numerous PhDs in the sector.
Over the past few decades, several Indian pharmaceutical companies (CDMO, CRAMS and CRO) have gained the trust of major pharmaceutical companies due to their capabilities, timely delivery and confidentiality of research databases.
We are now witnessing these Indian companies reaching critical size and scale, prompting major pharmaceutical companies to shift existing substantial business programs out of China and drive incremental new product pipelines to Indian companies that now have the capacity for large-scale manufacturing.
The ‘China +1’ strategy is well known, but you also mentioned ‘Europe +1’. Can you explain how the European strategy is impacting Indian manufacturers, and which industries are most impacted by this shift?
The challenges in Europe are multi-faceted: the demographic trend is more towards consumption than towards a productive workforce, leading to high labor costs.
Moreover, environmental regulations make it difficult and prohibitively expensive to set up new production capacities.
In contrast, Indian companies can demonstrate significant value addition (arbitrage) in terms of capital expenditure, operating costs and R&D costs compared to existing and proposed manufacturing capabilities for sectors such as Specialty Chemicals, Pharmaceuticals, Engineering, Power Equipment, Automotive Components and Textiles.
What about gold and silver? Both precious metals are also riding the liquidity wave.
Over the past two years, the US dollar has weakened against the euro (over 13%) and the British pound (over 19%).
Commodity prices such as aluminum (+20%) and copper (+26%) have also increased.
During the same period, the price of gold in US dollars has risen by almost 60%. Therefore, the bullish trend in precious metals appears to be in sync with the weakening of the US dollar.
What will be the potential impact of Chinese stimulus on global commodities? We are seeing some increased activity in the metals sector.
Over the past decade, more than 50% of increasing global demand for most commodities has been driven by Chinese consumption, mainly for building infrastructure and housing.
Currently, it appears that China has sufficient capacity in both areas, which could limit incremental consumption. It therefore remains uncertain whether the Chinese stimulus measures will stimulate sustainable demand for raw materials.
However, as mentioned earlier, the weakening of the US dollar, which in turn drives demand for alternative asset classes, could be a major factor influencing commodity prices.
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