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Why markets are betting on manufacturing sector revival?

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There is a buzz about the manufacturing sector in the stock market in 2022. Let’s see why this is happening.

Let us dial back a few decades. A manufacturing revolution took place in the 70s and 80s when the Asian Economies of Japan followed by Korea grabbed opportunities that came their way to become tiger economies. Then China led the surge in global factory output starting in the mid-90s. The new world order had Western consumers led by Americans as buyers and Chinese and East Asian factories as manufacturers. The pandemic and the war in Europe have disrupted that order. 

For the first time, Apple will ship the latest iPhones from India, a manufacturing facility other than China. That is perhaps just the beginning of something new to India’s growth story. The Tata Group is reportedly talking to the Taiwanese supplier Wistron to set up a facility in India for Apple products. 

The manufacturing sector is all set to make the mark as foreign companies look to diversify from China in the much-touted China + 1 policy. This is perhaps India’s massive opportunity to boost its manufacturing sector. The performance-linked incentive or the PLI scheme has already attracted many domestic and foreign businesses. The government is setting new targets for manufacturing-led growth. India’s minister of state for IT and Electronics, Rajeev Chandrasekhar, said at a panel discussion organised by the US-India Business Council that India could become a $300bn electronics manufacturing industry by 2025-26. Not only in Electronics, but even in the Defence sector, the Indian Government has set a goal of reaching $5bn in Exports by 2025. While this number may seem optically small, it’s a significant milestone that signals the shift in capabilities of Indian Companies.

It’s not surprising that the top performers in 2022 are shares of companies in the Defence, Engineering, Capital Goods, Manufacturing, Automobile, Consumer Durable Goods & Public Sector Enterprises. There is a significant increase in capital spending by listed companies in 2021-22. According to media reports, that is likely to continue till 2026-27.

Usually, a country’s economic growth is a good lead indicator of its prosperity and health. Manufacturing and services growth rides on growth prospects. Businesses tend to ramp up capacity to meet the demand driven by faster economic growth.

The most exciting aspect of the latest economic growth data was that the manufacturing sector is back to contributing the same amount of output as it did before the pandemic outbreak, according to a section of analysts. 

Private consumption in the June 2022 quarter grew at over 25%. That is significantly higher than the 13.9% reported a year ago. That is an important indicator of things to come for the manufacturing sector. If private consumption grows faster over the next few quarters, the demand for goods and services could rise, too, since half of India’s GDP is consumption-led.

The other important factor is gross fixed capital formation. That is the indicator of asset creation in the economy and a metric for measuring growth in the manufacturing sector. It stood at 29.2% for the quarter to June 2022. It is now only marginally below the pre-pandemic level. That is good news for the manufacturing sector which is clearly showing strong signs of recovery.

The purchase manager index or the PMI shows expansion for August 2022. While the composite PMI index suggests a flat trend, the number is well over 50 (56.2), suggesting future expansion. With the emphasis on manufacturing capacity expansion, new sectoral opportunities are available for investing. You could look at Defence, Engineering, Electronics, Manufacturing, and Consumer Durables for potential winners.

Another way to play this theme is by investing in the carefully curated thematic alphamatters created by our Investment team at Alphaniti. Our “India Capex Alphamatter” (+25.3% in the last 3 Months) and “Make in India Alphamatter” (+26% in the last 3 months) are amongst the best performing themes in this space in the market today. Come and check out these investment themes and their performance in greater detail at www.alphaniti.com

References:

India Ratings and Research: Most Respected Credit Rating and Research Agency India

New Laws Will Be Catalyst For Digital Economy: Rajeev Chandrasekhar

Gross Fixed Capital Formation increased y-o-y by 29.2% in June quarter

GDP | Private consumption up 26% in Q1, downward revision seen in FY23 growth forecast

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