There are several magic pairs which create opportunities for wealth creation. Take for example basic materials and industrials.

The Indian economy has great need for capital goods and infrastructure. The need is immense; power, housing, offices, retail, roads, hospitals, refineries, industrial equipment and much more; you name it and it is needed. Capital goods and infrastructure are ever so essential, because they are needed to expand capacity, which in turn facilitates the next phase of growth. India can be expected to provide high growth rates in demand for commodities. At the same time, demand from China remains elevated. While the growth rate in demand for commodities can be expected to slow, the gross recurring demand remains stable. And as the United States responds to structural weakness in its economy (over-consumption, high debt and low production); I expect a fundamental shift as the Country seeks to restore its primacy as a producer nation; this too should provide a significant dose of growth in demand.

Now for industrials to prosper, their suppliers must prosper too. Basic materials outperform ahead of industrials based on expectations of elevated demand. The industry is capital intensive and the investment required in mining and materials is heavy. Capex plans will not be deployed until expectations of long term prices have increased to a level where the marginal costs will be covered.

The dance continues. As the economy expands, the basic materials sector prospers; ultimately prices exceed marginal costs by a wide margin. When marginal revenues exceed marginal costs by a wide margin, competition and capacity expansion come into play. This has a major impact on the long term price expectation. At this point in time, demand from industrials contracts; projects are no longer viable at prices prevalent. Basic materials under-perform as the economy goes through contraction ahead of under-performance from industrials. Prices of basic materials contract, falling rapidly towards and below marginal cost; at this stage demand expected from industrials rises. Once the industrial sector is expected to outperform, the prices of commodities can be expected to stop falling; the sector will ultimately outperform ahead of industrials. Another interesting magical pair is the basic materials industry & price of the underlying commodity. The stock market is forward looking. Prices of stocks in the materials and mining segment fall ahead of commodity prices. Once the commodity price starts falling, it does so rapidly. As it falls below the marginal cost of production, you see a producer response. Producers will cut production in order to reduce marginal costs; at the same time falling supply will put a floor beneath commodity prices. Commodity prices at this stage will continue a gentler downdrift. But since the capital markets are forward looking, the decline in value of stocks in the material and mining sector will cease. From here, the basic materials sector will commence out-performance ahead of industrials; commodity prices will continue a drift downwards and commence a vigorous ascent as physical demand kicks in. Again, the stock market predicts direction for the underlying commodity. In recent years, trading this opportunity in pairs has become more difficult because the relationship between commodity price and physical demand has broken down. The ability to invest in directly in physical commodities has risen with several commodity exchanges around the world. The use of derivatives together with financial investor interest, means that the commodity prices are less responsive to physical demand.

In extreme circumstances, when an economy is expected to be in a long lasting contraction, material prices will continue falling even after production cuts. You will then see additional producer response; they will respond to demand destruction by cutting marginal costs - this time around they go beyond production cuts; they cut capacity. Cuts in production are temporary and easily reversed; the saving comes from elimination of variable costs. Cuts in capacity are more permanent; it is closer to dis-investment (or at a very minimum deferral of investment) and the costs saved will include both fixed and variable costs. At this point in time this is not a situation I expect to unfold; long term demand from China is stable, demand growth will slow considerably but the gross recurring demand is not at a stage where it can be realistically expected to contract. At the same time, long term demand growth from India can be expected to escalate rapidly. And as the United States responds to structural weakness in its economy (over-consumption, high debt and low production); I expect a fundamental shift as the Country seeks to restore its primacy as a producer nation. The market is predicting a protracted recession and producer cuts to capacity have come into play; in my view these will reverse by late q1 09 and metals will power on. Steel and Iron Ore are both fundamentally strong in this age where infrastructure development in India and China is critical; it is now even stronger since the developed nations will likely use investment in infrastructure as a Keynesian response to the crisis.

So you have a magical pair in industrials and basic materials. You have another in basic materials and the underlying commodity. If you hear their song and dance to their tune, you have opportunities to create wealth.

India Sectors - A Secular Trend for the Globe

Thus far, India passed through the secular age of Information Technology. This was an important first step as the tools to enhance productivity were a must. She did this not just for herself, but for the globe too. In doing so she created a trickle of wealth. She next proceeded to the secular age of Consumer Discretionary; everyone from the fruit vendor to the CEO carries a mobile today; and it is still growing. Bicycles have been upgraded for scooters and motor cycles, scooters and motor cycles have been upgraded for cars, retail malls and leisure have grown in importance, people bought houses; all this in the secular age of Consumer Discretionary which now draws to a close.

Now, she strives to enter the secular age of Basic Materials in anticipation of the secular age of Industrials. Within that secular trend, she now enters a strong cyclical upturn in Basic Materials. This, in anticipation of a cyclical upturn in Industrials, with the Commonwealth Games as a catalyst. Yes, roads are needed, trains and public transportation is needed, hospitals are needed, power stations are required (even nuclear power is needed), potable water is necessary as is proper sewage, residential accommodation is needed, office space is needed, retail malls are needed; the Country strives to urbanize; all this is needed and much else. So far India is still at the need recognition stage; real demand exists because the need & the ability to pay are both in place. Yet, so far much has been promised, and little delivered. Today, India is at the door-step of a secular age of Basic Materials. Before entering the secular age of Industrials (which we call Capital Goods in India); India first must past through the age of Basic Materials. She needs iron ore, steel, copper, cement; besides much else to build the nations infrastructure. Similarly, she needs chemical, fertilizer, seed; besides much else before she builds her tractors. She is also entering a strong cyclical upturn in Industrials, which will be led by a cyclical upturn in Basic Materials. So what holds India back: Firstly, Basic Material prices have been greatly elevated. China passed through its secular age of Basic Materials a long time ago. It passed through its secular age of Industrials and entered the secular age of Energy in 2003. In the run up to 2008, in the midst of its secular age of Energy, China passed through a cyclical upturn in Basic Materials & Industrials, aided by the Olympic Games as a catalyst. For India, it is always a dis-advantage being second in line; demand is the desire backed with the ability to pay and the ability to pay is impacted by price levels. Nevertheless, prices have pulled back, with expected reduction in China demand following conclusion of its cyclical Industrials cycle, and so India should be ready to recommence the Basic Materials cycle from a lower base than recently; the demand side of the equation is thus in place. Secondly, capacity & supply was an issue. Cement capacity has been increased, as has steel and iron ore, fertilizer and chemicals amongst other Basic Materials. The corporates (Sesa Goa, Sterlite, Hindalco, Tata Steel, Essar Steel etc.) have done well to create the required capacity expansion and they continue to do so; for this is the secular age of Basic Materials. Of course the global miners and producers are ready and willing to supply at the equilibrium price. So supply is in place too. Thirdly, is the capital goods industry ready to run the cyclical up-turn? Yes, not only ready, but rearing to go. So far the Common Wealth Games infrastructure needs are woefully behind, perhaps with the exception of the airports and metro which are on target. Amongst the capital goods sector my favorites are L&T, Punj Loyd, GMR & Mundra - all ready to build airports, special economic zones, ports and other infrastructure. So this is no impediment. Finally, its the government. This is the greatest impediment to progress in India. It has changed a lot over the years, but controls still slow the pace of progress. Efficient price discovery is hindered because of interventionist government policies, be it in mining, sugar, steel, iron ore, cement, chemicals or fertilizer; no matter how noble the intentions, is always bad. Intervention can be legislative, it can be a dictatorial policy note, it can be an import or export tax, it can be a simple suggestion. Upcoming elections will cause problems short term; but perhaps once that is done, better sense shall prevail - the risk of an international embarrassment during the Commonwealth Games might prove a change catalyst. Now what confuses me is that the analyst community in India remains negative on materials but positive on capital goods. Is it not obvious, that for capital goods to succeed, first materials must prosper? Gentlemen and ladies, India's entry into a secular age of Basic Materials is not merely a trend within an economic cycle; it is a powerful secular trend with the ability to influence the global Basic Materials sector. Together with a cyclical upturn in anticipation of the Commonwealth Games, we have a very powerful catalyst in place for sector out-performance on an India and Global level.