Capex, Not Consumer Demand, Will Drive Multiplier Effect In Indian Economy: Kenneth Andrade
Indian indices may be near their all-time highs but the economy still has a number of opportunities on the cusp of a multiplier effect. And investors can spot such opportunities if they track the capital, according to Kenneth Andrade.
“The big picture seems to be there in a number of industries and when those industries kick-start the capex cycle, it could lead to the multiplier effect,” the founder and chief investment officer of Old Bridge Capital Management told BloombergQuint’s Niraj Shah in an interview. “So what we need to look at is the multiplier effect rather than how and where this demand will come from.”
The consumer economy is relatively smaller than corporate India since companies generally have larger balance sheets than households. The recently launched production-linked incentive scheme will lead to a larger multiplier effect even on incremental spending, he said.
Andrade expects this multiplier effect to play out in a number of manufacturing themes, particularly the renewable energy sector where price economics has tilted in favour of the eco-friendly sources compared with traditional coal-fired thermal power plants.
“It’s just economics at play,” he said, explaining that the scale of renewable energy has expanded to a degree where the cost of solar energy is down to Rs 2-2.5 per unit. Even the most efficient thermal plants can’t go lower than Rs 3 per unit, in comparison. “That’s a significant shift in the underlying economics.”
Second, the government’s push to increase liquefied natural gas’ share in India’s energy basket will lead to significant capital expenditure in the sector. The licences awarded at present alone will account for more than 100% of India’s pipeline gas demand, Andrade said.
He also reiterated that most manufacturing themes, and with them commodities, are likely to fare well as India tries to become an alternative production hub to China. “Just look at the source of the capital rather than trying to figure if 3% of the global economy (India) is actually going to do this,” he said. Even if India doesn’t accomplish this in the near term, companies should still perform for their investors, he said.
“We didn’t have a very profitable ’90s from an economic standpoint but look at some of the companies that came through during that time,” Andrade said, highlighting the size of India’s information technology and pharmaceutical sectors now.
Watch the full conversation for why Andrade is optimistic despite equity markets being at all-time highs.