Are India and China near the top of their economic cycles?

Posted on 10 June 2010 with 2 comments from readers

Emerging markets like India and China are frequently popular with small investors near the top of their economic cycles, which is not the time to invest. Assets will be expensive and a big crash is just around the corner.

There is plenty of reason to think this is the case in India and China right now. The very staging of an event like the first India Business Summit in Dubai this week is a classic indication of a market top. India’s trade with the UAE grew by 70 per cent last year, does that sound like sustainable growth?

What infrastructure?

Last week at the Middle East Investment Forum in Bahrain delegates were told that India intended to invest $700 million in infrastructure over the next five years. But you are more likely to find a bull in the road in India than an investment fund bullish on Indian roads.

Yesterday the Indian Minister for Commerce and Industry, Anand Sharma said GDP is set to double in the next five to seven years by simply projecting forward current growth levels. Pride comes before a fall. Markets move in cycles not straight lines.

Nobody doubts that with a national infrastructure ranked below that of the war-devastated African nation of Ivory Coast, Indian infrastructure is ripe for investment. The problem is mobilizing finance and corruption-free organization to carry this out. It has not been possible thus far in the 63 years since independence, and talks in Singapore about creating a $2 billion fund are a drop in the ocean compared to what is required.

The Bombay Stock Exchange is down 4.9 per cent this year after an incredible 81 per cent rally last year, and a government move to raise the minimum public holding for all companies now threatens to drag the market down further with some $15 billion of share offers about to flood the market.

Have Indians been speculating on stocks and real estate when they should have been building infrastructure in an economic boom period? Most Indians would agree with that assessment. Plans announced this week to build the world’s tallest residential building in Mumbai could also be an omen of doom.

China crisis

China is a different story but with the same conclusion for investors. The near 50 per cent rebound in export orders in May can be read as a return to business as normal, or the last dying breath of the previous boom brought back to life by a world beating stimulus package equivalent to 50 per cent of GDP, and lesser actions by governments in key export markets.

Increasingly China is characterized as an overheating economy – with Honda workers striking for a 35 per cent wage rise. Inflation is out-of-control courtesy of the over-sized stimulus last year. Real estate and construction is a huge bubble about to burst, with massive overcapacity in many sectors now and homes that nobody can afford to pay for.

China therefore has at least built its first-world infrastructure, something third-world India is still talking about at a conference in Dubai today. But China is now nearing the end of a long run of high GDP growth, and will soon enter a major recession and consolidation period. That is how economies run, from boom to bust. And the bigger the boom, the bigger the bust.

That is perhaps why the Shanghai stock market has been the worst performer among major stock markets in the world this year, and has been falling since last summer. This is reminiscent of the Dubai stock market’s fall that preceded the real estate crash of late 2008.