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Daily Intelligence Briefing for July 14th

India and China are Trading Places

Today’s Issue Cluster: INDIA 

At least when it comes to consumption, China and India want to trade places. So far, the trends are still going the other way.

In China, after years of investment-led growth, the planners want to rebalance the economy toward consumption. According to the World Bank’s latest data through 2013, household consumption is just 34.1% of GDP, compared to 69% in the US. It is unlikely to reverse course this year, given the expanding “mini-stimulus” to boost growth through construction and other big infrastructure projects.

In India, consumption’s share of GDP is nearly twice as big at 61.8%, and trending up. The new government – the first with a lower-house legislative majority in 30 years -  has an ambitious agenda to boost investment by cutting subsidies, reforming imperial-era labor laws, and opening up to foreign ownership of everything from retail stores to defense industries. India’s shift will also unfold over many years, with the finance minister describing the new budget as “the beginning of a journey.”

CONSUMPTION TRENDS IN INDIA AND CHINA DIVERGE …
Source: World Bank, McAlinden Research

Both countries now have new leaderships with renewed goals to boost consumption in China and increase investment in India. For investors, the question is whether this time is any different and which country will succeed. It might come down to politics. India is the world’s largest democracy and the new prime minister has a clear mandate to change the status quo and open up entrenched sectors to the market, a factor that has been equally critical to change in Japan and Mexico. China, meanwhile, remains at its core a centrally planned economy, with the market playing a deeper but nonetheless subordinate role. In a pinch, China’s policymakers fall back on directives, as they have once again with this year’s ever-expanding “mini-stimulus.”

The markets might already have it figured out. The stock markets in China and India have delivered similar returns over the past several years, with the relative strength of the Sensex to the Shanghai Composite remaining a relatively tight range until just recently. It is early days, but India’s stock market has been outperforming Shanghai almost to the day that Narendra Modi won the election. While China’s ultimate day of reckoning as a massive short has yet to arrive, it is already losing ground to India in a pair trade.

… WHILE INDIA’S STOCKS STARTED OUTPERFORMING AFTER THE ELECTION

 Source: Bloomberg, McAlinden Research

Today’s Issue Cluster: India 

  • India’s new government adopts China’s old model: boost investment to accelerate growth … with slow implementation
  • Subsidies on food, fuel, and fertilizer are to be cut … currently amount to 16% of the budget
  • Excise taxes on tobacco are to be hiked
  • Foreign ownership caps are to be lifted, including defense
  • New equity share issues are set to go up 4-fold through the rest of the year
  • India needs to generate 12 million new jobs each year just to absorb the biggest youth cohort bulge in history
  • 84% of factories have fewer than 50 workers … compared to 25% of factories in China

Best of the Rest:

Ship - Petro-pirates plague busy Southeast Asia lanes
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Cigs - A Tobacco CEO Who ‘Vapes’ Could Alter the Industry

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McAlinden Research Partners, a division of Catalpa Capital Advisors, provides daily, weekly, and other periodic reports that identify actionable investment themes early. As students of change, we specialize in the identification of critical inflection points for asset classes, industry groups, and other clusters of securities. MRP reports complement the individual investment styles of clients by guiding them to where they can find investment opportunities. MRP clients include pension funds, sovereign wealth funds, private banks, asset managers and wealth advisors from around the world. Disclaimer: The information provided in this presentation (the “Report”) is not to be reproduced or distributed to any other persons. This Report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, sources for public data include Bloomberg, Trading Economics, and FRED (Federal Reserve Bank of St. Louis Economic Data). McAlinden Research publishes daily, weekly, and other periodic reports on the economy and the markets. Catalpa Capital Advisors, LLC (CCA) is a Registered Investment Advisor which manages client accounts. References to specific securities, asset classes and financial markets discussed herein by McAlinden Research are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Securities discussed in the Report may or may not be held in accounts managed by CCA and/or its associated persons, and changes in those accounts may be made at any time without notice to its subscribers. Neither McAlinden Research nor CCA is under an obligation to inform research recipients if any accounts managed by CCA subsequently purchase or sell securities discussed by McAlinden Research and they do not anticipate providing such information.

 

 

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