Return of the growth trade : BofA ML

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Return of the growth trade
Capital investment reviving, business confidence returns
The deceleration in the rate of investment growth was one most conspicuous
outcome of the melee that followed the breakout of sub-prime crisis. Many
projects were suspended or completely shelved, as credit availability became
scarce and focus turned on deleveraging. The government got busy managing the
crisis rather than promoting growth. The general elections in the interim also did
not help.


From the market perspective, the momentum in the ‘growth trade’, namely credit
fuelled capital investments, especially in infrastructure and manufacturing sectors,
suffered a big setback. Strong household consumption demand saved the day for
the economy. The market took the cue and latched on to the theme. In our view,
the suspended ‘growth trade’ is now reviving and should share the podium with
consumers. The market, in our view, should also recognize the opportunity that
lies here in the months to come.

Infra spend to double in XIth and in XIIth plan
As per the revised estimates, the investments in core industries are likely to grow
to Rs20tr in XIth five plan period (FY08-FY12) from Rs9tr in Xth plan. The
investment are projected to further double in XIIth plan period (FY13-FY17) to
Rs41tr or ~9% of GDP.
Power sector, the single largest driver of growth
The revised estimates suggest that the power sector shall attract largest amount
of investment (Rs6.5tr) in the XIth five plan period, adding ~70GW power
generation capacity. Over half of this new capacity being coal based, coal
mining/import and transportation volumes are likely to surge in the next few years
creating large opportunity for coal logistics and handling equipment businesses.

Logistic infrastructure investments growing 2x
Investment in roads, bridges, railways, ports and airports is projected to grow over
2x during the XIth plan period from Rs2.6tr to Rs5.6tr. A similar growth could be
expected in the XIIth plan given the aggressive growth plans and lower than
planned execution in the current XIth plan period.

China and India tighten as US (Q) eases
Chinese policy makers surprised the world with a 25bps hike in lending and
deposit rates when the developed world was bracing itself for the second round of
quantitative easing by the US Federal Reserve. The RBI had also normalized the
policy by hiking little more than the market expectations. This has triggered a
debate as to whether the unprecedented global economic cooperation seen in the
immediately after the Lehman collapsed is already waning!