Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19
Silver Is Cheap – And Getting Cheaper - 7th Oct 19
Stock Market Back to Neutral - 7th Oct 19
Free Market Capitalism: Laughably Predictable - 7th Oct 19
Four Fundamental Reasons to Buy Gold and Silver - 7th Oct 19
Gold and Silver Taking a Breather - 7th Oct 19
Check Engine Warning Light ECU Dealer Diagnostic Cost - Land Rover Discovery Sport - 6th Oct 19
Natural Gas Reloads For Another Price Rally - 6th Oct 19
Understanding and Purchasing different types of Plastic Building Materials Online - 6th Oct 19
Craig Hemke: Ignore the Elliott Wave “Buffoons” Calling for a Gold Crash - 6th Oct 19
Stock Market 6 Month Trend Forecast Conclusion - Video - 6th Oct 19
The True Causes Behind the Yield Curve Inversion and Gold - 5th Oct 19
Strategies on how to be a Successful CFD Trader - 5th Oct 19
Gold Stocks Correction Underway - 5th Oct 19
Climate Change When the Levee Breaks - 5th Oct 19
Federal Reserve Bank ‘Guarantees’ Dow Will Not Sink Below 26k - 5th Oct 19
The Russell and Transportation Tell A Completely Different Stock Market Story - 4th Oct 19
Confidence Drives the Economy and Trump’s Trade War Is Killing It - 4th Oct 19
ADL Predicts Crude Oil Prices Will Fall Below $40 - 4th Oct 19
Investing Money? Why You Need a Reputable Accountant - 4th Oct 19
Stumbling Manufacturing and Rising Gold – Now or Later? - 4th Oct 19
Silver Eyes Fourth Quarter Rebound - 4th Oct 19
Gold Price Forecast to Exceed $10,000/Ounce - 3rd Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

India’s Reliability Provides a Razor Thin Investment Edge Over China

Stock-Markets / Emerging Markets Aug 12, 2008 - 07:27 AM GMT

By: Money_Morning

Stock-Markets Best Financial Markets Analysis ArticleMartin Hutchinson writes: With sky-high growth potential, China and India are the two markets no investor can afford to miss out on. But that doesn't mean they're impervious to market turbulence, and in times of trouble, India is the more reliable investment.


No doubt, both countries' markets are suffering this year, with China's Shanghai A Index down 50%, and India's Sensex Index down 25%.  It's no secret that India is struggling with both a growing budget deficit and mounting inflationary pressure. But China has problems too – it's just hiding them under the carpet until the Olympics are over.

That's why, for me at least, the investment decision is clear – I'll buy the country whose problems are out in the open and already reflected in stock prices.

China's Pending Credit Crunch

China's inflation has been quiescent recently. It declined from 8.7% year-over-year in February, to 7.1% in June, taking it below the People's Bank of China's (PBC) one-year lending rate of 7.47%. Since the principal driver of global inflation has been the sharp run-up in energy and commodity prices, China's inflation moderation is anomalous.

Apart from any figure-fudging in the run-up to the Olympics, China's moderating inflation can be explained by increased state controls and subsidies. Rice and wheat prices have been controlled only since January, while energy subsidies have increased in 2008, from $22 billion to $40 billion, as the country holds petrol prices down to two thirds the U.S. level – around $2.85 per gallon in Beijing.

Those effects alone would suppress reported inflation by 3%-4%.

China has also used every effort to produce a quiescent population and clean air for the Olympics –1 million cars have been banned from Beijing streets for three months, for example. But once the Olympics are over, those Herculean efforts will no longer be necessary. We can then expect an easing of food price controls (which themselves require subsidies to bail out farmers) and a sharp reduction in energy subsidies. At that point, it seems inevitable that reported inflation will soar into double digits.

The PBC's lending rate of 7.47% and deposit rate of 3.33% will then be highly inflationary. It will also provide substantial disincentives to saving. Since the Chinese authorities appear to understand the role of interest rates in controlling inflation, rates will no doubt be raised sharply, so that at least the lending rate will be in double digits, along with inflation.

A post-Olympic credit crunch will be the result, but it won't affect the largest government-controlled companies. They will be bailed out if they run into difficulty. However, the crunch will be particularly damaging to small businesses, as well as the true private sector.

The Devil You Know vs. the Devil You Don't

In India, on the other hand, wholesale inflation rose from 7% in March to almost 12% in July.  The Reserve Bank of India is also running negative real interest rates; they are currently about 8% nominal.

As in China, the Indian government is subsidising food and forcing the state-owned oil companies to sell gasoline to domestic consumers below cost. The result has been an explosion in the Indian budget deficit, which is thought by many observers to exceed 10% of India's gross domestic product (GDP) in the fiscal year to March 2009.

Both China and India are dealing with excessive inflation, interest rates that are too low, and budgets that are out of balance (though China's figures are so opaque one cannot be sure of the true position). Falling oil prices could help the inflation position in both countries, but it is unlikely that oil prices will fall enough to restore stability in either.

The difference between the two countries is that China is still under the impression that its inflation is a moderate and controlled problem, whereas India has no such illusions.

For this reason, I would be more tempted by an Indian investment in the current market than by a Chinese one.

When investing in India, it is advisable to focus on companies that are internationally competitive and active exporters, rather than looking at the domestic market. That's because any budget or inflationary difficulties will probably be reflected in a weakening of the rupee, which will help exporting companies. It is also preferable to look for companies with, at most, moderate leverage, which are less likely to suffer from a banking squeeze.

Infosys Technologies Ltd. (ADR: INFY ) is India's premier exporter of software, with almost no debt, that is currently trading at about 17 times earnings to March 2009, with a dividend yield of 1.9%. That high rating reflects the growth potential of Infosys' business sector, in the context of which it is reasonable.

Dr. Reddy's Laboratories Ltd. (ADR: RDY ) is India's premier manufacturer of generic pharmaceuticals, poised to benefit in the 2008 - 2012 period as many popular drugs lose their patent protection and are opened to international competition. It has moderate debt, about 50% of equity, and is also selling at a multiple of 17 times earnings to March 2009, with a dividend yield of only 0.8%. Again, the relatively high rating reflects the growth potential in Dr. Reddy's global business.

News and Related Story Links :

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Bo
07 Sep 08, 16:41
wrong on inflation

you said: it seems inevitable that reported inflation will soar into double digits.

well, right now, the Olympics are over now and the Chinese inflation is easing, isn't it?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules