Published on March 22, 2009
“CHINA & INDIA” “HATE US, LOVE US BUT CAN’T IGNORE US” EVEN IN THIS TOUGH ECONOMIC ENVIRONMENT
“CHINA AND INDIA” – “HATE US, LOVE US, BUT CANNOT IGNORE US” 2 In this article I try and find answers to question such as where to invest in two of the largest populated countries in the world, given the backdrop that the world even it wants cannot choose to ignore these two countries. What is/will the fate of their economies and currencies given the current scenario and going forward? Why CHINA off lately has started talking about making their country reduce their dependence on export and more towards being a consumption driven country? Much rather all the money proposed in approximately 600 billion US$ stimulus is targeted towards reducing dependence towards exports and making sure that internal consumption on the back of internal production and demand drives the economy going forward. Is CHINA taking a lesson from INDIA? What are the problems and advantages this Indian economy and currency is having? Which areas can be considered as a viable investment option? In my view, both China and India have their own set of problems and advantages which are unique in nature. But the equation which China and India throws to the outside world is a famous dialogue i.e., Hate us or Love us but you cannot ignore us. And this holds true in this extremely vulnerable scenario of global financial and economic meltdown on the back of one strong advantage which both the country share together i.e., POPULATION and subsequently ONE OF THE LARGEST MIDDLE CLASS POPULATION. Despite this one common advantage, the functioning and positioning of both these countries on international arena is quite different, India is positioned as one large country which is consumption driven, wherein CHINA on the other hand is positioned as export driven economy. But given March 23, 2009 the current focus of Chinese govt. to reduce their dependence from exports and focus on their internal strength on the back of huge population by boosting consumption. India on the other hand proudly claims that though we are not immune to the global financial and economic meltdown, but we are somewhat in the safe zone due to our consumption led economy which to certain extent holds true as well… Vinit Tulsyan http://vinittulsyan.wordpress.com
“CHINA AND INDIA” – “HATE US, LOVE US, BUT CANNOT IGNORE US” 3 Before getting into both the countries specific problems and advantages and the area/sectors which an investor could look for investing in; given what the future is in store, let’s look at some of the facts about both the economies; March 23, 2009 Vinit Tulsyan http://vinittulsyan.wordpress.com
“CHINA AND INDIA” – “HATE US, LOVE US, BUT CANNOT IGNORE US” 4 The Consumption Theme With respect to India, segregating the GDP reveals that private consumption accounts for 58%, government expenditure 10%, investments 35% and net exports - 4% of GDP. While the current environment of weakening global demand will slow down investments as corporate profit growth slows down, India’s consumption growth is expected to remain firm on strong demand from rural India and increasing proportion of the country’s population entering the labor force. (Source IIFL report) On Chinese front, on the expenditure side, consumption accounts for 48.8%, investments for 42.3% and net exports for 8.9%. While consumption takes the biggest pie, growth during the last several years was largely driven by investments and exports. Since 2001, investment has been the single largest contributor to GDP growth. Exports emerged as a major driver since 2003, with China’s entry into the World Trade Organization. (Source IIFL INCH report) March 23, 2009 Vinit Tulsyan http://vinittulsyan.wordpress.com
“CHINA AND INDIA” – “HATE US, LOVE US, BUT CANNOT IGNORE US” 5 India’s problem With respect to India, the biggest problem pertains towards DEFECITS and subsequently higher borrowing costs (partly due to high deposit rates as well) for all including the govt. (as the borrowing programme would now be in double digit of GDP. The other biggest problem lies with respect to uncertainty regarding who is going to be forming the next govt. as in most likely case, it is going to be a “KHICHDI” govt., and with more power tilting towards regional parties not only in one region but across the states, no wonder whose policies you can bet on. The future looks uncertain with respect to good governance, rural development (the need of the hour), business climate, funding deficits through other means such as disinvestments due to regional parties bargaining power, deterioration in competitive environment (for example look at JAYPEE Group and the projects (both in quantity and value terms) awarded to them, differences on foreign policy front and… so on and so forth… Chinese problem China might have almost 2 tn US$ in foreign reserves and ~ 800 bn in US$ denominated assets, as the value of US$ goes down so as their bargaining power. Their dependence on exports is going to be the biggest drag on their economy. This confidence stems from the facts that it’s two of the biggest exports markets i.e., US, entire European region, have tilted their policies towards an extremely low interest rates scenario even going forward in the future and subsequently as these economies print more currencies either to buy treasuries from the market or to further stimulate economy, the impact would be felt harder on their currency fronts. This weakening in currency coupled with lower borrowing cost would make them less import dependent and export led industries would start flourishing in their own economies. The social unrest is big another problem which poses a significant threat on the entire business environment. YUAN losing its bargaining power which might force CHINA to revalue March 23, 2009 their currency to the downside Pressure from international community to depreciate YUAN might not lead china to depreciate its currency, but the slowdown in exports based on emergence of export led industries (providing support to domestic consumption as well) in western Vinit Tulsyan http://vinittulsyan.wordpress.com
“CHINA AND INDIA” – “HATE US, LOVE US, BUT CANNOT IGNORE US” 6 countries and European markets will force them to depreciate their currency, and then they have a different new problem. The advantage but… The era of double digit GDP growth is over now and the advantages lies in the claim these two countries keeps on making i.e., huge population and subsequently two of the largest middle class markets to invest in. The advantage India has over china in this arena is its consumption led story but with no sign of Rupee rebounding to mid 30s or late 30s level in near future on the back of deficits on both the fronts, increased govt. programme, ratings downgrade by global rating agencies, declining foreign reserves, less flow of foreign money in the country, limited options with RBI to intervene and give boost to the currency, reducing interest rates (by RBI not necessarily by banks) and finally the fact that INR still not a currency of immense bargain anywhere in the globe with no full account convertibility, all these factors given above and subsiding with the fact that India being a net importer, it’s going to hurt the entire growth story. To Summarize… and where to invest in? There can be a lot which can be talked about, but the first and foremost conclusion I derive after analyzing so many different factors unique to both the countries, bothThe countries are having one biggest advantage as mentioned in the above paragraph, I would invest in industries which will give you some confidence when you talk about it and not just talk about the growth story of both the countries (now a past). I would focus on selecting opportunities within in Education, Healthcare, Financial Services, Banking, Media including internet, retail and telecom etc. These selected industries due to the fact that going forward these industries would become more of more of necessities, can achieve scale and not dependent on currency and outside world but would be driven by internal consumption which is supplemented and backed by largest and two of the highest middle class population in the world. March 23, 2009 Thanking You, Warm Personal Regards, Vinit Tulsyan http://vinittulsyan.wordpress.com Vinit Tulsyan http://vinittulsyan.wordpress.com
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