C.J. Lawrence Weekly – China’s and India’s Economic Growth Prospects are Good for Equity Prices

As the US House of Representatives and Senate work through the machinations of domestic tax reform, President Trump has been visiting the globe’s fastest growing region, discussing trade relations, and meeting with regional heads of state. His visit to China looks to have delivered few tangible new business opportunities for U.S. companies, but despite the challenges of operating there, many are making marked progress in the world’s most populous nation. Despite a relatively saturated smart phone market, Apple reported 40% shipment growth in iPhones to Chinese consumers in the most recent quarter. General Motors’ China business is up 2.1% year-to-date, but accelerated in October to 10%, led by a 36.1% surge in Cadillac sales. Starbucks had soft comparable store sales globally, in its recently reported quarter, but saw same store sales in China expand at an 8% clip. Revenue in the third quarter for YUM China, the spin-out from Yum Brands, grew 8% year-over-year. As expected, China domiciled firms performed even better. The grand-daddy of reports on the state of the Chinese consumer came over the week-end when Alibaba reported results from its “Singles Day.” Gross merchandise volume for the day climbed to $25.3 billion, up 39% from last year.

To be sure, China faces a new set of challenges as it attempts to manage its economy, encourage entrepreneurship and innovation, improve the living standards of a larger portion of its population, and enact reforms that protect the environment, all at once. From 1978, around the time economic reforms began, to 2011, China’s annual GDP expanded at an average rate of 9.9% per year. Between 2012 and 2016 that rate slowed to 7.2% and currently fluctuates between 6.7% and 6.9%, depending on the reporting service. But despite the deceleration in GDP growth, the Chinese consumer economy is still growing at 10% a year. According to a study conducted by the Boston Consulting Group, by 2021, China will add $1.8 trillion in new consumption. That is roughly the size of Germany’s consumer economy today, and more than one-fourth of all consumption growth of major economies.

China’s economic expansion continues despite a stubbornly high “Ease of Doing Business Index” ranking by the World Bank (released in October 2017). This year, China remains the 78th ranked country in the survey, down only eight spots in the past ten years. At the same time, China’s Asian neighbor, India, has made important strides in the rankings, improving 30 spots to rank 100 in this year’s survey. India’s rank has improved from 142 in only three years. Prime Minister Modi’s business, tax, and monetary reforms are given much of the credit for the improvement. Despite downward adjustment to near-term economic growth forecasts, as a result of the reforms, the IMF expects India’s economy to recapture its status as the world’s fastest growing economy in 2018. With a population size that is expected to surpass China’s by 2024, and a potential workforce set to climb from 885 million to 1.08 billion in the next twenty years, India’s economy represents another powerful engine of global economic growth. The prospect of both China’s and India’s economies growing simultaneously at ~7% for extended periods, alongside growing economies in the US and EU, lends considerable support to the global growth thesis, and is bullish for corporate profits and global equity prices.

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