Posts Tagged ‘India’


When was the last time you had a pay rise? Many people might answer that question by saying “about five years ago.” Envy the Chinese, or Poles, or Mexicans, or Indians. According to PwC, they are likely to see their wages shoot up. This is set to be a very important development, with implications for investors and businesses seeking new opportunities. But maybe workers in the west don’t need to be too envious, the pay gap will still be pretty enormous. It’s a very important trend all the same.

Between now (2013) and 2030, real wages in the US and the UK are expected to rise by about a third. Let’s hope that’s right – relative to what we have seen over the last half decade that would be a result. But over that same time frame, average wages in India could more than quadruple in real dollar terms and more than triple in the Philippines and China.

Let this chart do the talking:


So what are the implications? First of all see the expected rise in wages across these countries in the context of re-shoring. See: Is manufacturing coming home? It will clearly provide the impetus for companies re-shoring their manufacturing closer to where most of their customers are.

What we may see, as wages rise in China, is not only more manufacturing in home territories, but nearby too. Opportunity, as they say, knocks for Poland and Mexico.

Looking further ahead, PwC says places such as Turkey, Poland, China, and Mexico will therefore become more valuable as consumer markets, while low cost production could shift to other locations such as the Philippines. India could also gain from this shift, but only if it improves its infrastructure and female education levels and cuts red tape.

From a corporate/investment point of view, who will be the winners and losers? PwC reckons western companies who may emerge as winners will include retailers with strong franchise models, global brand owners, business and financial services, creative industries, healthcare and education providers, and niche high value added manufacturers.

As for losers: well, watch mass market manufacturers, financial services companies exposed in their domestic markets, and for companies that over-commit to emerging markets without the right local partners and business strategies.

© Investment & Business News 2013


George Osborne recently tried to assure us. “I don’t think in the current environment a house price bubble is going to emerge in 18 months or three years,” or so he told parliament this week. The Bank of England governor promises us he won’t let it happen – no bubble here, thank you, not today, tomorrow, or for as long as he is boss. Yet a poll among economists found that around half reckon a new bubble in the market is likely. The latest survey from the Royal Institution of Chartered Surveyors (RICS) may even provide evidence that such a bubble is underway right now. Why then, do we see such complacency? And how dangerous is it?

Actually the no bubble here argument seems to come from two different sides of the spectrum of economic thought. There are those, such as Capital Economics, who tend to be on the bearish side. House prices won’t shoot up in price, it suggests, because prospective new home owners can’t afford higher prices, and real wages are, after all, still falling. From the other side of the spectrum seems to come the view that there is no bubble because the very word bubble seems to suggest something negative. It may be true to say that this other side of the spectrum sees rising house prices as a good thing.

Okay, let’s look at the surveys. The latest Residential Market Survey from RICS may or may not provide evidence of a bubble but it certainly seems to provide evidence of a boom. The headline index, produced by taking the percentage number of surveyors who said prices fell in their region from the percentage number who said they rose, hit plus 40 – that’s for the month of August. It was the highest reading for the index since November 2006. The survey also found a rise in supply as more properties come on the market, but that the rise in demand was even greater.

As has been pointed out here before, the RICS index is not only a good guide to the housing market, it seems to provide a good barometer reading of the UK economy. The trajectory of history of this chart, and its correlation with the GDP a few months later, suggests the UK economy is set to see growth accelerate.

Now let’s turn to the other survey. This one comes courtesy of Reuters. A total of 29 economists were surveyed and asked about the prospects of another housing bubble. Nine said the chances are small, seven said the chances were even; 11 said likely; two said very likely.

Mark Carney suggests, however, that he won’t let it happen. He recently told the ‘Daily Mail’: “I saw the boom-bust cycle in the housing sector, the damage it can do, the length of time it took to repair.” These are encouraging words. He is saying trust me. Just bear in mind however that a housing bubble appears to have developed in Canada during his time as boss of the country’s central bank.

George Osborne turned his attention to the topic. On the subject of loan to value ratios, and the way in which first time buyers have had to find such enormous deposits in recent years, he said: “This change is not something we should welcome. It is both a market failure and a social problem – imagine if you’d had to find twice as big a deposit for your first home. 90 per cent and 95 per cent LTV mortgages are not exotic weapons of financial mass destruction. They are a regular part of a healthy mortgage market and an aspirational society.”

Here are two observations for you to ponder.

Observation number one is the British psyche. It is as if it is hardwired into the DNA of the British public. They are driven by fear to jump on the housing ladder, driven by more fear to rise up it, yet without questioning the view they believe that when the equity in their homes rises, they are better off, have more wealth, meaning they don’t need to save so much for their retirement. In short the UK housing market is prone to bubbles. The UK economy can often boom when house prices rise, and the reason is deep rooted in the British psyche. Whether this is good thing or not is open to debate. However, this point about the psychology does not seem to be understood by many economists, the markets or the government.

Observation number two: The new governor of India’s central bank Raghuram G Rajan used to be the chief economist of the IMF. Between his stint at the IMF and his new role in India, he wrote a book called ‘Fault Lines’. In it he suggested that rising house prices was the way in which democratically elected government were able to compensate their electorate for the fact that their wages had only risen very modestly. Mr Rajan was not suggesting a conspiracy; merely that the economic fix found by authorities proved to be the path of least resistance.

A boom in which the UK economy becomes more dynamic, maybe one in which QE funds investment into infrastructure, entrepreneurs, and education, creating a work force better equipped to cope with the innovation age we now live in, would be a wonderful thing. A boom based on rising house prices, however, would be a much easier thing to create, so no wonder Mr Osborne is so keen on the idea.

© Investment & Business News 2013


The Indian government has just made a rather interesting new appointment. It concerns the man who is to head the country’s central bank. The man is… well, he is rather clever and well regarded across the world. But what makes this one so very interesting, is that talk is that Barack Obama’s choice for the next boss of the Fed is rather controversial. And what is really really interesting is that amongst the critics of Obama’s choice is the man who is set to take over at India’s central bank.

Okay let’s name some names. The man who is to take over at India’s central banks is Raghuram Rajan – former chief economist of the IMF and the author of ‘Fault Lines’. In his book, Mr Rajan postulated the theory that surging house prices were used by western governments as a way to kind of compensate for the fact that real wages were rising only very slowly. So, during the boom years, the gap between the super-rich and everyone else grew, profits to GDP rose while wages to GDP fell, and median workers in many countries found that over a period of many years – years of boom that is – their real disposable income didn’t grow at all. These were not good developments. We should have had recession when demand was suffocated from the economy. Instead, the money that companies were not spending sloshed around the system, eventually leading to lower interest rates, more credit, more mortgages, higher house prices, more household debt, and a consumer boom based on leverage.

Mr Rajan was one of the most prescient of the world’s economists and his theories to explain what was charging the boom and then the crash are probably spot on.

Now to change the mood a little: consider the Fed. The Fed’s deputy chair is Janet Yellen, and she is the person many want to see take over from Ben Bernanke next year. Talk is that Barack Obama wants Larry Summers to have the job. Now Summers was US treasury secretary under Bill Clinton – a massive critic of QE – and was the man whom many hold responsible for loosening the stranglehold of the Glass–Steagall Act, which separated investment and retail banking. Summers is not liked by Republicans and quite a lot of Democrats have their doubts about him, but he is a heavy weight in the world of international finance and politics – there is no doubt about that.

Many of the world’s top economists are critics of Summers, including the likes of Paul Krugman and Joseph Stiglitz, and Raghuram Rajan of course. Let’s say it happens and next year Summers and Rajan are both central bankers. For once when India’s central bank meets up with the Fed, many will see it as a meeting of equals – that will come as quite a shock for a US that is used to having things its way.

As for India, the appointment of Rajan may yet prove to be a key moment as the country attempts to re-establish itself as one of the world fastest growing economies.

© Investment & Business News 2013

If there is one thing finance ministers and their equivalents from Brazil, Russia and China had in common, it was their criticism of the US policy of quantitative easing. Brazil was especially vocal, and its finance minister accused the US of engaging in currency wars as QE in the US led to a cheaper dollar, and a more expensive Brazilian real relative to the US currency.

Brazil and Russia had two other things in common, however, and that is a threat from inflation, and reliance on the sales of certain commodities. As one effect of QE seems to have been to drive up the price of assets, including commodities such as oil, both Russia and – to a lesser extent – Brazil have benefited from QE via their exports. That QE arguably pushed up the price of both their currencies relative to the US dollar, then US QE may also have helped to lead to lower inflation in both countries.

Since markets have begun to price-in the effect of the US ending QE, the Brazilian real and the Russian ruble have fallen relative to the dollar. In Brazil the government and the central bank have responded by upping interest rates, and reducing Brazil’s tax on foreign transactions from 6 per cent to zero.

In Russia, despite falls in the ruble and the fact that inflation was 7.4 per cent in May – which is well above Russia’s central inflation target of between 5 and 6 per cent – hikes in interest rates are not thought likely.

Of more concern is Russia’s reliance on oil and gas. In projecting its latest budget, the Russian government assumed an oil price of $105 per barrel. The IMF projects Russia’s fiscal deficit to be around 2 per cent of GDP in 2014, but stripping oil and gas out of the equation means the deficit is likely to be around 12 per cent of GDP.

If the price of oil and gas fell significantly, which is possible in the era of shale gas, while interest rates rose, the Russian economy may be vulnerable to a backlash against emerging market bonds.

Before 2008 the Chinese economy grew without running up massive debts. In 2008 total outstanding credit, as recorded by the People’s Bank, was 130 per cent of GDP. Since 2008, however, according to Capital Economics, outstanding credit in China has risen to 187 per cent of GDP. Capital Economics also stated: “Outstanding credit stood at 195 per cent of GDP in March, an increase of 66 per cent of GDP in little over four years.”

According to the ‘FT’, local government in China has run up massive debts. The ‘FT’ stated: “Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy.”

Recently, Fitch credit ratings agency downgraded China’s credit rating. To quote the ‘Telegraph’: “Total credit has jumped from $9 trillion to $23 trillion in four years, an increase equal to the entire US banking system.” George Soros, according the same ‘Telegraph’ article, has warned that there could be a run on China’s entire banking system akin to the collapse of Lehmann Brothers.

In the ‘Financial Times’, Martin Wolf wrote: “The fragility of the [Chinese] financial system could increase very sharply, not least in the rapidly expanding “shadow banking” sector.”

India’s economy has slowed down sharply in recent months, dashing hopes that its growth rate would be even greater than China’s during the first few years of this decade. One of India’s challenges relates to its current account deficit – around 5.1 per cent of GDP in 2012, according to the IMF. This makes India vulnerable to a backlash in emerging market debt.

© Investment & Business News 2013

The IMF has now released its latest outlook for the global economy. So who are the latest winners and losers?

Well, let’s start with the world’s biggest economies.

It won’t surprise you to learn that China is still top of the pecking order. The IMF forecasts growth of 8.0 per cent this year followed by 8.2 per cent next.

India is expected to stage something of a recovery, from 4.0 per cent growth in 2012, to 5.7 per cent next year and then 6.2 per cent.

In South America, Brazil too is expected to enjoy a recovery, with growth increasing from 0.9 per cent in 2012 to 3.0 per cent this year. Mexico is expected to outperform Brazil this year, and next, however.

Russia is predicted to chug along with growth between 3 and 4 per cent, as was the case last year.

As for the world’s largest developed economies, it’s kind of going with size. The fastest growth rate is expected to apply to the US, expanding by 1.9 per cent this year and by 3.0 per cent next. Then we have Japan (1.6, then 1.4 per cent) and then Germany (0.6 followed by 1.5 per cent.)

The UK is expected to see a marginally better performance than Germany – 0.7 then 1.5 per cent, while France is expected to contract this year by 0.1 per cent before growing by 0.9 per cent next year.

Incidentally, the IMF is still sticking to the line that next year will be better. It always does seem to say that these days. It said it in 2008, 2009, 2010, 2011 and 2012. No doubt, this time next year, after revising its forecasts for 2014 downwards, it will predict an improvement in 2014.

Drill down and Europe’s star performer in the growth league in 2013 is expected to be Latvia, followed by Turkey, then Estonia and Lithuania. The worst performer is expected to be Greece, then Portugal, followed by Slovenia, Spain and then Italy.

Ireland is expected to grow by 1.1 per cent this year and by 2.2 per cent next. Iceland is expected to do slightly better this year and slightly worse than Ireland next year.

In Asia, Indonesia is expected be in second place behind China, followed by the Philippines, and then Thailand, India, and Vietnam.

In the Americas, Paraguay is expected to lead the way – in fact it is expected to have the fastest growth rate in the world (11.0 per cent). Chile, Bolivia and Ecuador are in second, third and fourth spots respectively; all are expected to grow at between 4 and 5 per cent. Venezuela is expected in last place.

In the Middle East and North Africa, Iraq is expected to be the fastest growing economy this year followed by Maghreb, then Qatar. Iran is expected to see contraction.

In Asia, Turkmenistan is expected to top the list followed by Kyrgyz Republic and then both Uzbekistan and Tajikistan.

In Sub-Saharan Africa the order from the top is expected to be Sierra Leone, Swaziland, the Gambia, Mozambique and the Ivory Coast. Both Sierra Leone and Swaziland have been subjected to massive swings with huge contractions last year, and anticipated huge growth this year.

©2013 Investment and Business News.

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