The shift in supply chains away from China, Nomura said, has set in motion what economist Kaname Akamatsu called the ‘wild-geese-flying pattern’ of economic growth, whereby production shifts from the lead goose (advanced nation) to the next flock of geese (developing nations).
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China’s role within the global value chains, Nomura believes, is also changing. It is now a lead goose (investor), with most of its investments concentrated in ASEAN, while a majority of the investments into India are from the US and developed Asia.
For India, Nomura believes benefits are likely to accrue for companies operating within the electronics and solar supply chains, select auto and auto ancillary sectors, companies geared to the EV ecosystem, autos and auto-ancillaries, some pharma/biotech companies and lastly the defence sector.
“Among these sectors and within the stocks in our coverage universe, we like Reliance Industries, Bharat Electronics, Exide Industries, Sona BLW and Uno Minda,” wrote Saion Mukherjee, managing director and head of equity research for India at Nomura in a recent coauthored note.
As corporate capex picks up, it expects the Indian corporate sector to sustain 12 – 17 per cent earnings growth in the medium-term.
“We expect corporate capex and domestic manufacturing to be the key drivers of India’s corporate earnings. As manufacturing picks up, private capex will record a stronger recovery over the medium-term. Over the long-term, the supply chain relocation should lead to an improvement in the trade balance and current account deficit. This implies higher value add in India supporting corporate earnings,” Mukherjee wrote.
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The frontrunner in the ASEAN region, Nomura said, is Vietnam with most of the investment originating from Chinese companies. By sector, they see interest in automobiles (EV), electronics (PCs), energy (solar panel) and other sectors like shipping containers and chemicals. These, Nomura said, should lift Vietnam's exports from $353 billion in 2023 to $750 billion by 2030, a CAGR of 11.4 per cent.
Meanwhile, the manufacturing-led growth in India, Mukherjee said, will also have a rub-off effect on consumption. As corporate profitability improves, he expects a higher dividend payout, which in turn would further support consumption and corporate earnings.
Strong and sustained earnings growth along with the support of domestic flows into equity markets should keep equity valuation multiples elevated, Nomura said.
The valuations of stocks, the research and broking house believes, which are direct beneficiaries of India’s capex and manufacturing themes – for instance in the industrial and electronic manufacturing services (EMS) spaces – are very high, factoring in the strong growth narrative adequately.
“Exposure to the overall growth theme can be gained through domestic-focused companies. Our key overweight sectors in India are financials, energy, auto ancillaries, infrastructure, telecom and healthcare,” Mukherjee said.
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While there are benefits to be had from these themes, the benefits, it said, will only accrue over time, and investors need to be patient to realise the full benefits. As these manufacturing shifts materialise, Nomura expects a larger impact on fundamentals of companies and sectors and more and more opportunities to emerge.
"We believe that the ongoing supply chain reconfiguration is part of the tectonic shift taking place under the hood of Asia’s economic landscape. We see several opportunities for equity investors who wish to participate in this multiyear mega-theme. Equity investors thus should not expect immediate benefits and will need to be patient," Nomura said.
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