The Monday Edition- US, China & Japan Relationships – India & FDI

By Yaser Anwar, CSC of Equity Investment Ideas

It is my belief that to profit in financial markets, whether you’re a trader &/or investor, one needs to understand the implications of intermarket relationships, especially in our global economy, where everything is intertwined.

Today I’d like to discuss three such relationships. 1) US & China Trade 2) US & Japan and 3) India & FDI

US & China Trade

• The boost from US consumer driven imports from China, may be nearing its peak, which could have negative implications for that economy given that it is benefiting from an approximate $215 billion annual trade surplus. Hence, the Democratic Congress’ urge to push a more protectionist line of action against China could have catastrophic consequences for the US & China.
• China’s industrial production growth is starting to come down in light of the Central Bank’s rate increase to curb inflation and excessive capital investment. This effect is somewhat spilling over in commodities and can be part of the reason for the recent commodity weakness. Furthermore, we’re seeing money flow out of the Natural Resource funds, depicted in the image below, at the highest rate in the past few years.
  
• As you know, demand for credit is robust and there are no signs of a significant shift in fundamentals. However, credit quality is a potential problem for aggressive lenders. Credit risk profiles have been deteriorating as the low interest rate environment has stimulated demand for money. As a result, credit card use is up and consumer bankruptcy is at record levels.
• As the image below indicates recessions of ’90–91 & 00–01 did not occur right when delinquency rates began to pick up off the bottom. Hence, it would seem foolish to contend that a consumer-driven recession is imminent on the basis of this trend reversal.

US & Japan

• Japanese economy saw negative economic growth rate both in nominal & real terms (in 01), and a huge amount of non-performing loans in the financial sector. Through subsequent efforts toward structural reform, the Japanese economy has been continuously shifting from prolonged stagnation to economic growth led by private sector demand, normalizing the non-performing loan problem among major banks (the ratio of non-performing loans held by major banks decreased from 8.4% at the end of 01 to around 2% as of the end of 2006) and enhancing corporate structures by eliminating three excesses (excesses in employment, capital stock and debt) in the corporate sector which had been hindering growth.
  

• Japan is still an export nation, albeit one that is increasingly less reliant on the US. Growth is being driven by Asia, but also by domestic consumption as a new generation allows itself luxuries its wartime predecessors would not.

India & FDI

• According to Inside Global Markets– "While all emerging markets have been beneficiaries of flood of capital to some extent, India has been among the most popular by far, receiving an estimated 25% of total portfolio flows into EM markets. According to Morgan Stanley, in the three years through 2005, non-foreign direct investment (FDI) flows accounted for 83% of total capital flows in India, compared with an average of only 32% for a basket of other top emerging markets, including Russia, Mexico, Turkey, and China."
• As you can see, a tidal wave of big money investment is the primary reason the Indian market has done so well of late. However, institutional investors are very fickle, so the market is vulnerable to enormous potential declines once the trend reverses. Which is exactly what happened during the May 2006 sell-off, the Indian EM funds declined the most out of all EM ETFs.
• If you’d like to benefit in India, I’d suggest looking into the Cellular Market. With 6.8 million new subscribers a month in November only, India recently surpassed China as the fastest growing cell phone market in the world. India still lags behind China in total subscribers, with a mere 143 million compared with China’s 449 million. But that’s almost double the 75 million amassed a year ago, and India is closing the gap with rival China fast. India has set a goal of reaching 500 million subscribers by 2010.
• No wonder Vodafone is looking to invest in China (cell phone penetration is 40-50% in cities but is an abysmal 3-4% in villages). When a global telco like Vodafone looks to invest, so should you (prime example of trend following).

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