White House Infrastructure package effects on India
After our last article, we felt the need to talk about how the $1.2 trillion Infrastructure plan’s tail effects will play out globally and specifically with regards to India. We do not plan to talk about particular securities, as it makes the idea transactional (Ex: JSW steel gains because of new orders or Tata steel supply volumes increasing for the foreseeable future etc.).
What we want to discuss are the tail effects, and when it comes to cyclical industries and the behavioural effect of large legislative plans in any part of the world on other economies in the world. Let us take a commodity to understand this better - Steel has a finite capacity globally, much like Oil which most of us are familiar with. It takes a long time for global capacities to go up since it is a slow moving process.
People often say that no Indian company directly benefits from higher steel purchase by the US; this is correct in terms of first order thinking. Second order thinking tells us the demand for steel globally will still go up leading to robustness in steel prices directly benefiting steel players in India and around the globe. Another very important mental model we need to keep note of with regards to cyclicals is that most costs are fixed (depreciation, interest) and with commodity prices high, their return ratios would jump almost immediately – this is true for most such industries like building materials, cement etc.
Also, when China steel industry or Japan is supplying more to the US, it leaves the door open for other clients who were previously purchasing from them. A similar case study can be seen with semiconductors currently where automobiles are not getting the required supply due to home appliances getting the first preference from the semiconductor industry.
Lastly, we should consider any industry like people. Rate cuts in some parts of the world led to large scale rate cuts globally. With cyclicals is akin to countries’ nuclear arsenal, a human view cannot be discounted – fear. China’s nuclear weapon resulted in India’s leading to Pakistan’s and on and on since then. Most political leaders live in fear of either losing their power or missing out on progress that someone else might succeed at. India is also is in the middle of a historic trillion dollar plan to upgrade the country’s infrastructure. US Infrastructure plan will lead to large scale infrastructure spending in other countries (most likely not in China) for a variety of reasons.
First and foremost, it is an easy lever to pull to inflate the employment numbers – one of the key factors on which political parties are judged. Secondly, a lot of countries have outdated infrastructure and want to catch up with one shot and this is one of the ways to do it, setting up a 10 year plan to upgrade the country’s outdated infrastructure. Thirdly, in many countries, Infrastructure spend is a constant necessity to either meet the demands of the growing population like some Asian giants or that Infrastructure is the only way to keep the banks ticking as it keeps momentum in the economy leading to achievement of GDP growth numbers.
Until next time…