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Trade wars hurt economic growth and stock prices. Unless, of course, they don’t – for some markets.
The U.S. and China have been locked in a trade battle since U.S President Donald Trump announced tariffs on US$60 billion worth of Chinese goods coming into the U.S. back in March.
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In recent months, China’s stock market has clearly been on the losing end. U.S. shares have held up well – even in the face of rising interest rates.
As shown in the graph below, other Asian markets that depend on global trade have also been hurt, including Hong Kong (down 12.9 percent), Singapore (down 12.7 percent), Malaysia (down 13.1 percent) and South Korea (down 18.9 percent).
But one market has emerged relatively unscathed from the fallout – India.
India’s economy is accelerating
One of the biggest concerns about the trade war has been its impact on global economic growth.
According to the International Monetary Fund (IMF), ongoing trade tensions could knock 1.6 percentage points off China’s annual GDP growth. Meanwhile, it expects global GDP growth to be reduced by 0.2 percentage points – to 3.7 percent – over the next two years.
There are now signs of that starting to happen.
China’s 6.5 percent GDP growth in the third quarter of 2018 was the slowest in nearly a decade. Japan’s economy is flat-lining despite still record-low interest rates, while Canada (a previous target of Trump’s trade war) has seen growth slow sharply.
Lots of factors can contribute to a slowdown in economic growth. But in recent months, the uncertainties surrounding trade relations between the world’s two largest economies is a huge distraction.
But as I said, India has been performing well. For starters, its stock market (as seen in the chart above) is down by only 3.2 percent in U.S. dollar terms since the trade war began. In local currency terms, the market is up nearly 10 percent.
This strength reflects India’s economy, which has gone against the global trend – accelerating sharply since the start of the year. From 6.8 percent in the fourth quarter of 2017, its economy grew by 8.2 percent in the second quarter of 2018.
How? For starters, India’s economy isn’t heavily reliant on trade. Its international trade accounts for just 44 percent of its GDP, compared with Vietnam (200 percent), Thailand (122 percent), Germany (87 percent) and the Philippines (71 percent). So not being one of the world’s most trade-friendly nations has its advantages during a trade war.
And India’s domestic economy is proving resilient.
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Indian consumers are opening their wallets
Back in May, we wrote (here) about how India’s consumer spending was finally on the runway for sustained growth thanks to 250 million Indians now being part of the middle class.
As a result, Boston Consulting Group forecasts that India’s domestic consumption will triple from US$1.4 trillion to US$4 trillion between 2016 and 2025. That’s the equivalent of growing 12.4 percent a year for nine straight years.
India is one of the world’s fastest growing automobile markets. It’s also the world’s fastest growing major market for things like smartphones and computers.
Smartphone sales grew 20 percent in the second quarter of 2018 to 33.5 million. That compares with a 7 percent decline in China, the world’s largest market for smartphones.
Personal computer shipments (including notebooks) grew at an even faster 28 percent pace in the second quarter.
Air travel is becoming increasingly popular. In September, Domestic carriers flew 19 percent more passengers, compared to the same period last year.
Meanwhile, India’s e-commerce industry, like China’s, is also booming.
Retail e-commerce sales are expected to grow 31 percent this year to US$32.7 billion. That’s still only 2.9 percent of total retail sales in India (e-commerce accounts for nearly 25 percent of all retail sales in China). But online sales could more than double to US$72 billion by 2022, according to eMarketer.
These are growth rates that remind me of China five years ago, and they’re accelerating.
Furthermore, India also has some of the best demographics among emerging economies. With 50 percent of its 1.3 billion-strong population below the age of 25, India has one of the youngest populations on the planet – a vast pool of cheap labour to support the economy and add to future consumption.
So India will likely continue to be an outperformer in the global market, especially with the U.S.-China trade war still far from reaching a conclusion.
Editor, Stansberry Churchouse Research
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