Global Market Commentary

March 09, 2015

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New Leaders Are Taking the Growth Baton

National Growth Rates Are Shifting

As we all know, for the last decade China has been the most impressive grower of the major nations. It is now the world’s second-largest economy. India has been a tolerable grower — but a huge underachiever given its potential. India could become the world’s fastest-growing major economy –growing at a 7.5 to 8.5 percent rate in the next 12 months. The U.S. growth rate is probably running at around 3 percent. China will be falling to about 6.5 percent according to their official statistics; we think it could actually be slower — probably about 4 percent actual growth. European growth should pick up as a result of the QE they are undertaking, and we anticipate growth of about 1 to 1.5 percent.

Growth rates are rising in Europe and India. This is good news for the world. We are bullish on Indian stocks.

European growth will accelerate in 2015 to 2017, according to ECB President Mario Draghi. He also states inflation will return to 1 to 2 percent within a year or two. India’s new budget is positive for growth and for the attraction of foreign direct investment (FDI) to India. Last Saturday, the new Indian budget was announced. It is positive for growth and for encouraging FDI. A major key to China’s historical growth was their ability to attract FDI; now that India is moving in that direction, it is positive. Due to India’s bureaucracy and its slow-moving, fractious democracy, we expect India to make progress at a good rate, but not as fast as China did.

Main Points on the New Indian Budget

1. Infrastructure investment will rise by 25 percent next year. Included are a 127 percent increase in spending on highways, 30 percent increase in railway spending, and five huge power projects of 4 gigawatts each. China also made huge infrastructure investments during its economic rise, but a big infrastructure push will be more challenging for India than it was for China. China could simply take land from peasant farmers, while India’s land laws are convoluted and very difficult to change.

2. The corporate tax rate will be cut from 30 percent to 25 percent over the next 4 years, and tax exemptions will be diminished.

3. A general sales tax will be introduced by April 1, 2016, to replace the wild number of local fees and taxes that make it hard to do business in India.

4. The deficit will equal 3.9 percent of GDP.

5. Fuel subsidy reduction will continue as oil prices fall; subsidies will be 3.3 percent in 2016 and 3.7 percent in 2015 compared to 4 percent in 2014.

We remain bullish on India. In our opinion, the budget is bullish and very pro-business when compared to historical budgets. India remains a complex country with a complex and stifling bureaucratic structure. Some of the restricting bureaucracy will be diminished, but much will remain. We expect India to grow at a 7.5 to 8 percent rate over the next year. This is a good rate, but far below India’s potential growth rate…

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