Gary Shilling is one of those market commentators you’ve just got to respect. He’s the Wall Street guru who has urged investors to load up on long-term U.S. Treasury bonds for the past 30 years, a trade that has consistently made money because of falling interest rates. He’s not a one-trick prognosticator either. Among his other great calls was a prescient warning about the possibility of a U.S. housing collapse, years before it actually happened. He was also among the few to predict the trend that started in the early 1980s to disinflation, just when nearly everyone else feared high inflation was going to be permanent.
His latest investment observation, made in a note to clients, is equally unusual, and should be of interest to all those playing emerging markets. In a contest pitting the economic prospects of China and India, he makes a surprising call: Bet on India.
Now this is a pretty gutsy forecast because most people probably see things the other way around.
Exhibit No. 1 for why conventional thinking might have Mr. Shilling wrong is that China is growing faster than India. Except for a few brief interludes, that has been the case for more than three decades. China has also run a highly successful mercantalist policy of currency suppression to win exports, in the process amassing the world’s largest foreign exchange hoard. And whatever you may think of its political system – a capitalism-practising communist dictatorship – you have to admit it’s been rather successful at making China an envied powerhouse in the global economy.
India is not even in the same league. It’s far poorer, for one thing, with a GDP per person around $1,500, less than a third of China’s figure around $5,200.
Mr. Shilling admits that until recently most people “saw China as the undisputed king of emerging world powers” and yet he says “in the long run, we’ll bet on India as the leader of major developing countries and a significant player on the global economic stage.”
The relatively positive take on India versus China seems to be playing out in a little-noticed stock market trend, where there is wide divergence between the two Asian countries. It’s a David-and-Goliath story, with India drubbing China, which is somewhat surprising given the latter’s better growth rate and popular image as the emerging market champion.
In fact, the Shanghai composite has been falling for years and is now trading back near the lows reached during the financial crisis four years ago. It’s down a staggering two-thirds from its 2007 peak, and even though recent economic growth figures have been better than expected, the market hasn’t been able to pull itself off the mat.
India’s BSE 30 index, meanwhile, has recovered from its crash losses and is only about 7 per cent below its 2010 high.
Mr. Shilling is basing his call on some under-appreciated weaknesses in China and strengths in India.
One problem in China is that its miniscule consumer sector creates an unbalanced and vulnerable economy. Only 37 per cent of Chinese GDP goes for consumption, compared to about 30 per cent that is exported and just under half that is plowed back into the economy as investment. That’s a pretty shaky foundation for future prosperity, considering export markets flag whenever there is weak international growth. China is trying to compensate for this structural weakness by allowing wages to increase to boost consumer incomes, but this is driving low skilled manufacturing work to poorer parts of Asia.
Mr. Shilling gives India high marks for having a lively democracy, which he contends is highly useful for running a large, religiously diverse country. India has also inherited the benefit of having English widely spoken from its colonial past and has a Western-style, independent legal system that is quite different from China’s comrade-dominated courts. Consumer spending in India is 58 per cent of GDP, giving it a far more balanced economy. And its demographics are better, with a younger population, compared to a greying China.
Mr. Shilling’s views may be just hunches, but we’d be reluctant to bet against him.