The Times of India ran an interesting headline this morning:  “India to be fastest growing economy by 2018”

According to the article, India will overtake China, currently the fastest growing economy. This wouldn’t surprise me one bit.

China is an economic miracle, to be sure.  It is commendable how the Chinese have managed to pull so many people out of poverty in so short a time.  But as we’ve discussed in other posts, many of the factors that drove China’s growth are already slowing or will begin to slow soon:

1. Export growth to the United States and Europe is not likely to recover to its pre-crisis levels anytime soon.   This means that China will have to send a larger share of its exports to other developing countries — countries that, like China, are all trying to grow their economies via export growth.
2. China’s growth rate of urbanization  should significantly slow down in the coming years.  Migration is done by the young and economically “hungry.”  Once you turn 30 and presumably are married and /or have a family, it gets significantly harder to put all of your belongings in a suitcase and catch a bus to the big city.
3. There are limits to the sustainability of stimulus / infrastructure spending.  Virtually all of China’s growth in recent years has been due to infrastructure investments; so China had better find some new avenues for growth fast.
4. Finally, and perhaps most importantly, China’s Spending Wave peaks in 2015.  This implies that China has virtually no time to develop a strong consumer economy.  Even if Chinese consumption were to rise to American levels as a percentage of GDP tomorrow, within five years consumption growth would hit a wall, and HARD.

India has none of these problems, though it does have some others that we’ve highlighted in the past: horrid urban congestion, poor education for the bulk of the population, poor infrastructure in general, lack of basic sanitation in most of the country, and a truly rotten combination of mass democracy and a powerful, entrenched, and corrupt state bureaucracy that sucks the vibrancy out of the economy.

Still, all things considered, India’s problems can be fixed.  I’m not convinced that China’s can be.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

At HS Dent, we are generally quite bullish about the long-term prospects for India.  With a large population, a growing middle class, a developing consumer economy, and a tech-savvy workforce, India has a lot going for it.

Unfortunately, the country also has a history of getting in its own way.  For example, in today’s Financial Times, we read this little tidbit that will make you want to pull your hair out:

Indian authorities have sealed off about 300 mobile phone towers in a New Delhi suburb, after ruling that a decades-long ban on commercial activities in residential areas was being violated.

Telecom industry insiders said mobile phone services in Noida, a busy residential and industrial area near New Delhi, had been hampered by the move to put out of action nearly a third of the area’s 1,000 mobile phone towers, most of which have been in place for years.

The impact on consumers is huge — mobile penetration in the country far exceeds landline availability, even in urban areas.

Well, that’s just brilliant.  In an era in which fast communication is everything, send your citizens back to the Stone Age by cutting off their access to mobile phone towers — all in the name of enforcing what amounts to an insignificant municipal regulation. Read the rest of this entry »

HS Dent has an ongoing commentary on the Harley-Davidson Motor Company.  As any of Harley’s dedicated (fanatical?) fans worldwide will tell you, the company makes excellent bikes.  In addition to the quality craftsmanship, Harley comes with a certain image and a feeling that can’t be replicated.

Unfortunately, it also has an extremely narrow customer base: the typical Harley rider is a white male in his mid to late 40s.   Two important factors tend to converge around that age: the mid-40s is when the male mid-life crisis tends to hit.  And, perhaps equally importantly, the average American man lacks the disposable income to afford a Harley until he reaches the peak earnings years of his 40s (or, perhaps recently divorced in his mid-40s as many Americans are, the man finally has his wife out of the way and feels liberated to blow his money on toys for himself again). Read the rest of this entry »

With the world economy “reflating,” the price of oil and other commodities has surged.  This is consistent with HS Dent’s forecast for “one last hurrah” in commodities in mid-to-late 2009.  We believe, however, that the long-term picture for oil and commodities in general is quite bearish.

Consider Kopin Tan’s comments in this week’s Barron’s:

“…the slump actually has masked the beginning of a profound, long-term  shift that will affect oil and oil stocks for years.  Thanks to a confluence of factors–a legislative push to wean the nation off foreign oil, and end to very cheap fuel, a global rush toward fuel-efficient cars, fewer people driving to work and more citizens becoming concerned about the environment — U.S. gasoline consumption might never surpass the high of the summer of 2007.”

So, in reply to the “peak oil” supply arguments from many commodity bulls (and doomsday / conspiracy theorists), Mr. Tan has suggested we may instead be looking at peak oil demand.  

Mr. Tan may be a bit too optimistic about Americans growing to love compact cars; this remains to be seen.  But we do think that he is correct about U.S. demand for energy being somewhat muted in the years to come.

Meanwhile, we read in the Financial Times this morning that India, after its recent discovery, will now be supplying much more of its own crude oil and will depend less on imports.   We should also remember that Brazil made one of the largest discoveries in decades off its Atlantic coast, and this supply will be hitting the market in the next few years.

But what about China?  Won’t Chinese demand cause the price of oil to skyrocket again?  Maybe.  But we doubt it will be sustainable.  Investors are getting increasingly worried that China is on the verge of “blowing up.”  Yes, it is a country of 1.2 billion people.  But even a country of that size can have too much infrastructure.  Is China at that point yet?  Who knows.  Chinese government statistics are notoriously unreliable.  But at some point in the next few years, we believe the investment-fueled Chinese boom will go bust — knocking out a major source of oil demand.

Bottom line:  Look for a secular bear market in commodities, not bull.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Americans are used to buying cars and appliances on installment plans, but clothes?  

The Financial Times reports that Levi Strauss & Co. will be offering its jeans on an installment plan to Indian consumers.

India has had a vibrant consumer economy for years, driven by a rising middle class.  We view this as a positive for the world economy; more Indian consumers means more global demand, after all.  But in our view, Levi’s installment plan marks a move in a very different direction. Read the rest of this entry »

 We have an ongoing commentary on India, a country with almost unlimited potential but also with a LOT of problems that have to be resolved first.  Among emerging markets, we are attracted to India primarily for:

1. Its sheer size
2. Its orientation towards domestic consumption vs. exports (this makes the country less susceptible to contagion from global economic crises and weak demand from Western importing countries)
3. The country’s youth — with such a young population, Indian aggregate demand will only grow.

But, as we said, India is not without its problems, which include vast rural poverty and illiteracy, an antiquated caste system that still seems to linger on into the modern age, stifling governmental bureaucracy, a vast educational and wealth divide between the “haves” and “have nots,” and — the focus of this post — truly horrid infrastructure.  

The odd thing is, most of these complaints, including that of poor infrastructure, have been heard since the early days of the British colonial period! Read the rest of this entry »

In a prior post on India, we wrote, “India—which never enjoyed the export-fueled growth of her emerging market contemporaries—continues to plod along.  While there has been much to criticize about India’s economic policies in the past (and today too, for that matter),Indiamay well emerge from this long-term recession as the new economic leader ofAsia.”   A few days later, we wrote in a follow-up, “Unfortunately, the “good” countries who followed the economic rules have gotten punished…hard.  Meanwhile, the “bad” countries, who broke all the economic rules have survived relatively unscathed.”  Today, we see more evidence that India’s “bad” behavior has been rewarded.  The country’s rather dirigiste economy, in which the dead hand of government is quite a bit heavier than in most countries, continues to hold up relatively well.  Read the rest of this entry »