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 significant factor influencing commodity prices,” Edited excerpts:
You mentioned that creating alternative supply chains is a multi-year, multi-sector megatrend. Could you elaborate on the key drivers behind this shift and why it’s becoming increasingly important for global businesses?
Global purchasing managers have been seeking to de-risk procurement from China for many 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 the lowest-cost suppliers; they also want dependability and continuity in the event of a challenging global environment that could arise from various external factors.
The Indian market initially reacted sharply to China’s stimulus measures as well as geopolitical concerns. What is your perspective on the Indian markets following the recent rally that pushed the Sensex towards 85,000 and the Nifty 50 towards 26,000?
In the last few months, Indian markets have risen significantly, with most indices (large cap, mid cap, and small cap) increasing by 15%–20% in just the last four months and by nearly 30%–50% over the past twelve months. Therefore, some consolidation (correction) was expected.
While there is an expectation that Chinese markets are attractively valued, potentially diverting some foreign flows away from India, it’s crucial to note that, in the last three to four years, the main driver of Indian equities has been domestic flows from mutual funds, insurance, and direct investments by HNIs and family offices, rather than foreign inflows.In CY21, FIIs were net buyers of just about $1 billion, yet Indian equities still rose by 30%–50%. In CY22, when US and global interest rates were rising, FIIs were net sellers of over $16 billion, whereas DIIs were net buyers of $36 billion, and Indian equities ended positively, significantly outperforming the US and other developed markets.Additionally, corporate profits and India’s overall GDP have shown strong growth over the last 3–4 years.
India seems well-positioned to capitalize on this global supply chain realignment. In your view, what factors have contributed to India and its corporates establishing a “right to win” in sectors like pharmaceuticals, specialty chemicals, and automotive and ancillary industries?
Indian corporates have established the right to win by capitalizing on opportunities in at least six to seven manufacturing industries, including Pharmaceuticals (CDMO & CRAMS), Specialty Chemicals, Automotive and Ancillaries, Electronic Manufacturing, Engineering, Power Equipment, Textiles, and more.
What has been potential for India for many years is now turning into reality, with inquiries converting into substantial order books to be fulfilled over the next few years.
Indian corporates in these sectors have demonstrated domain expertise and the scale to meet global demand while respecting intellectual property rights better than their counterparts in neighbouring countries.
Additionally, government policies like PLI (Production Linked Incentives) and tax breaks for new manufacturing units (with an income tax rate of just 15% for an initial period) have also acted as catalysts.
You highlighted Pharmaceuticals (CDMO & CRAMS) and Specialty Chemicals as two industries benefiting from this trend. What specific strengths do Indian companies in these sectors offer that make them attractive partners in the global supply chain?
Indian chemists and their skills are recognized worldwide, supported by an abundant talent pool with numerous PhDs in the sector.
Over the last couple of 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 a critical size and scale, prompting major pharmaceutical firms to shift existing substantial business programs from China and direct 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.” Could you explain how Europe’s strategy is influencing Indian manufacturers, and which industries are seeing the most significant impact from this shift?
Challenges in Europe are multifaceted: the demographic trend leans more toward consumption rather than a productive workforce, leading to high labour costs.
Additionally, environmental regulations make it difficult and prohibitively expensive to establish new manufacturing 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 capacities 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.
In the last two years, the US dollar has weakened against the euro (up over 13%) and the British pound (up over 19%).
Commodity prices like aluminium (+20%) and copper (+26%) have also risen.
During the same period, gold prices have increased nearly 60% in US dollars. Therefore, the rising trend in precious metals appears to be in sync with the weakening of the US dollar.
What will be the potential impact of China’s stimulus on global commodities? We are seeing some heightened activity in the metal space.
In the last decade, more than 50% of incremental global demand for most commodities has been driven by China’s consumption, primarily for infrastructure build-up and housing.
Currently, it seems China has enough capacity in both areas, which may limit incremental consumption. Thus, it remains uncertain whether China’s stimulus will drive sustainable demand for commodities.
However, as mentioned earlier, the weakening of the US dollar, which in turn drives demand for alternative asset classes, could be a significant factor influencing commodity prices.
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