The Economist had a big splash about India a couple of weeks back - as usual with the Economist, it's pleasant to read, but you don't end up much wiser about anything other than that magazine's predictable prejudices. As always with the Economist, it was a useful starting point for thinking about India, and for reading further on the subject. My problem with the article was that it's a bit "on the one hand, on the other hand" - yes, there are some dynamic companies in India, but there are some state-controlled dinosaurs too. You could say the same about Russia (although the Economist would leave out the bit about Russia's dynamic companies). You could probably say the same about America or Japan.
The IMF blog also had a nice piece about India with a bit more meat in it. What this brought home to me is that India is much more like a "normal" developing economy - running a current account deficit, importing capital, diversifying its economy, that sort of thing. There's no sense that the government is trying to implement a transformative policy like that in China, and there are no commodity flows or stocks to deal with.
You could argue that India's "raw material endowment", like China's, is its huge population. But then, India hasn't implemented a policy of consciously making its workforce cheap, via the exchange rate. Why would they? No government seeking re-election would consciously hold back the standard of living of its population, as the Chinese government did in the 90s and early 00s. This means that India has modernised more slowly, but doesn't have to deal with the surpluses that the Chinese government has to recycle (current account surplus becomes capital inflows, which are either sterilized by buying Treasuries, or allocated top down into government approved investment). Of course, you get much faster economic development if you have the capital sitting there ready to be used, but one of the uses of adversity is that if capital is scarce, it gets allocated more efficiently.
This means that India might well be a happy hunting ground for stock pickers, because you don't have to continually keep an eye on the government or the global macro in the same way. Yes, there's an issue about the availability of capital to fund the current account deficit, but in a world of global imbalances, there is a large pool of capital looking for a good return. India has a reasonably flexible exchange rate which means that what you lose in the short term if the exchange rate falls can be made back in the long term because the terms of trade benefit. There's no second guessing what the government, US Congress, the oil price, or the commodities markets are going to do, unlike with China or Latin America or Russia.
One of the themes of this blog is going to be that individual stock picking in isolation is perilous, especially in emerging markets. You might find a good little company, that seems well managed and with a clean balance sheet and growing income statement. Something like a consumer play in China or Russia or Indonesia or Mexico, which offers the hope of being the local equivalent of Coca-Cola or MacDonald's. And maybe it will. But you will have to endure a great deal of pain in the short term if that stock price is driven down by perceptions that China is going to raise rates in order to stop baby food companies speculating in copper, or that the oil price is under attack from Libyan or Iraqi or even Brazilian supply. Even without that, you could own, say a nice little bank in a stable market, and see it decimated just because banking stocks are getting hit globally because of a rogue trader in France. No company is an island.
The other theme is that there are all kinds of missing markets and regulations that means that developing markets will not react in the same way to policy stimuli as their more developed counterparts. And you have to be aware of this. For instance, the proposition by Michael Pettis that higher interest rates might be expansionary in China, because people will earn more on their savings. Or that higher interest rates would automatically strengthen the currency - they do in most cases, but in Russia they might not, if the oil price happened to be going up at the same time. Before you apply the lessons you learned from Samuelson or Lipsey, think about what assumptions they were making, and whether they apply in this case.
But India is one country that perhaps goes against these themes. It has a more diversified economy, so there is less need to focus on one particular industry or commodity, and it has a flexible exchange rate and a current account deficit, so it's much more like a "normal" economy. Which is a good thing, as it means that although India's growth may be less rapid than other markets, it will be more steady and less volatile.
The IMF blog also had a nice piece about India with a bit more meat in it. What this brought home to me is that India is much more like a "normal" developing economy - running a current account deficit, importing capital, diversifying its economy, that sort of thing. There's no sense that the government is trying to implement a transformative policy like that in China, and there are no commodity flows or stocks to deal with.
You could argue that India's "raw material endowment", like China's, is its huge population. But then, India hasn't implemented a policy of consciously making its workforce cheap, via the exchange rate. Why would they? No government seeking re-election would consciously hold back the standard of living of its population, as the Chinese government did in the 90s and early 00s. This means that India has modernised more slowly, but doesn't have to deal with the surpluses that the Chinese government has to recycle (current account surplus becomes capital inflows, which are either sterilized by buying Treasuries, or allocated top down into government approved investment). Of course, you get much faster economic development if you have the capital sitting there ready to be used, but one of the uses of adversity is that if capital is scarce, it gets allocated more efficiently.
This means that India might well be a happy hunting ground for stock pickers, because you don't have to continually keep an eye on the government or the global macro in the same way. Yes, there's an issue about the availability of capital to fund the current account deficit, but in a world of global imbalances, there is a large pool of capital looking for a good return. India has a reasonably flexible exchange rate which means that what you lose in the short term if the exchange rate falls can be made back in the long term because the terms of trade benefit. There's no second guessing what the government, US Congress, the oil price, or the commodities markets are going to do, unlike with China or Latin America or Russia.
One of the themes of this blog is going to be that individual stock picking in isolation is perilous, especially in emerging markets. You might find a good little company, that seems well managed and with a clean balance sheet and growing income statement. Something like a consumer play in China or Russia or Indonesia or Mexico, which offers the hope of being the local equivalent of Coca-Cola or MacDonald's. And maybe it will. But you will have to endure a great deal of pain in the short term if that stock price is driven down by perceptions that China is going to raise rates in order to stop baby food companies speculating in copper, or that the oil price is under attack from Libyan or Iraqi or even Brazilian supply. Even without that, you could own, say a nice little bank in a stable market, and see it decimated just because banking stocks are getting hit globally because of a rogue trader in France. No company is an island.
The other theme is that there are all kinds of missing markets and regulations that means that developing markets will not react in the same way to policy stimuli as their more developed counterparts. And you have to be aware of this. For instance, the proposition by Michael Pettis that higher interest rates might be expansionary in China, because people will earn more on their savings. Or that higher interest rates would automatically strengthen the currency - they do in most cases, but in Russia they might not, if the oil price happened to be going up at the same time. Before you apply the lessons you learned from Samuelson or Lipsey, think about what assumptions they were making, and whether they apply in this case.
But India is one country that perhaps goes against these themes. It has a more diversified economy, so there is less need to focus on one particular industry or commodity, and it has a flexible exchange rate and a current account deficit, so it's much more like a "normal" economy. Which is a good thing, as it means that although India's growth may be less rapid than other markets, it will be more steady and less volatile.
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