What I read this week: Is poor health holding India back? Why China inflation is bigger threat

Not all is in the pink of health and India is facing severe healthcare crisis as spending remains very low. This would hamper the potential of the country, if the issues are not addressed timely. Inflation both locally and globally is bouncing back and is causing concerns in the global markets. Meanwhile, as the electrification theme gets bigger and powerful, surprisingly copper seems to be emerging as the winner in this upcoming megatrend.

Like there is a halftime at superbowl, financial markets are currently in the same phase and the journey is set to become bumpy so fasten your seatbelts and there is a lurking risk of inflation from China, yes China, which is yet to be priced by asset markets

I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week…

The health-growth linkage
( Source: India’s healthcare crisis holding back national potential )
India needs to focus much more on healthcare spending as its primary and secondary healthcare systems lack basic infrastructure and are inadequate and tertiary cares are overburdened. India’s spending on healthcare is just 1.4% of the GDP, the lowest among BRIC nations and less than neighboring countries such as Sri Lanka and Nepal. The National Health Policy has estimated an increase in health expenditure to 2.5% of India’s GDP by 2025.

India is currently facing many healthcare problems and progress on improving health outcomes has been slow. It has the highest population of children stunted (low height for age), at 48.2 million in 2015-16. Nearly 52.5 million Indians were impoverished due to health costs in 2011–almost half of the world’s impoverished population annually. India’s infant mortality rate of 41 deaths per 1,000 live births in 2015-16 is poorer than Bangladesh and Nepal and the African countries of Rwanda and Botswana. Over seven in ten Indians are not covered by insurance resulting in high proportion of out-of-pocket expenditure on health. In 2016, three in five deaths were from lifestyle diseases.

Although the government expenditure on health has increased over the past decade, it still remains very low. Unless the public healthcare infrastructure is improved considerably, India would continue to face developmental challenges and be unable to achieve its national and global potential.

How big is the risk from inflation
( Source: Inflation on the horizon & electrification, the upcoming megatrend )
Markets are becoming more concerned as quantitative tightening is leading to inflation rather than deflationary trends. Rising commodity prices, higher gold prices, Global PMI index (ended in 2017 at near 7 year high) and weak dollar are clearly signaling that we are tipping towards inflation. It seems we are now entering the third stage of inflation – price inflation after monetary and asset price inflation. This transition period should be a stress test for markets as quantitative tightening will increase in the months ahead.

Another reason for commodity price increase especially copper is Electrification. Electrification theme is getting bigger, powerful and is here to stay. Saudi Arabia and Norwegian State Pension Fund have pledged to invest a trillion dollars out of their future oil revenues; divesting from oil and focusing on innovation and technology, specifically electrification and green energy. Copper should significantly benefit from electrification and will grow at a CAGR of 4-5% over the next 20-30 years as compared to about 3%-3.5% historically.

This should continue to support higher prices as 50% of primary copper supply comes from 25 copper mines, mostly commissioned 70 or 80 years ago and there has been no scientific advancement in extraction and future supplies will need to come from countries that don’t have a historical understanding of copper mining. As the world increasingly moves towards electrification, copper is the commodity that will win the marathon.

The real risk to the bond market

( Source: The Halftime Show )
There is no doubt that lower US taxes are expected to have a positive impact on the real economy, although critics view that the tax cuts will add significantly to the American debt pile thereby causing a debt crisis for the country.

However, there is an enormous demand for USD and American debt and there isn’t enough of USD to spread around. Ironically, it is the world’s reliance upon USD and USD debt that will eventually cause the USD to lose its reserve status. This will occur – but first other currencies and sovereign debt will enter crisis first. The biggest worry and concern in the money world today isn’t tax cuts, trade wars or even the current stock market jitters. Instead, the greatest worry is the slowdown of money printing by the world’s central banks and rising long-term rates that would result in significant losses in the bond markets potentially measuring in trillions.

The real risk with the bond markets is what happens in Europe and the elections in Italy in March. Should Italy leave the Euro, run their own parallel currency, or even demand changes to the Maastricht Treaty – the ECB will be shaken to its core. The moment the sovereign debt crisis re-escalates in Europe, bonds everywhere around the world will decline sharply. And, the effect in emerging markets will be even more severe due to their reliance on the USD. However, the major point for investors to understand is global central bank monetary policies, combined with horrible domestic government fiscal policies has created a financial environment that will not be kind. Yes the USD is a part of the global web, however due to the way the USD is constructed – it is LAST in line to experience any restructuring. The Euro will be first, followed by Yen with USD remaining as the last one standing. Of course, the ride through these crises will not be smooth.

The bigger threat from the dragon land
( Source: China inflation — A global risk )
The risk of China exporting inflation remains real and this inflationary impulse could well show up in G10 inflation before it did in China’s own CPI measure. Some have asked whether it is mostly commodities that are responsible, but findings show that non-commodity export price inflation has a bigger sway. This is to be expected, as commodities make up only 5% of China’s total exports.

The annual data estimates show that Chinese non-commodity export price inflation explains 16% of the common trend in major economies’ inflation; commodity export price inflation explains 12%. Finally, it is worth thinking about how inflation will manifest itself. One possibility, of course, is surprise acceleration in Chinese CPI inflation. The other is that much less watched Chinese export price inflation gathers pace while CPI inflation rises by a lot less.

Underlying inflationary pressures in China are building and likely to be passed on to the global consumer. Chinese export price inflation in renminbi accounts for one-fifth of the variation in the common inflation trend in the major economies (US, UK, Germany, Japan, France, Italy, Sweden, Canada and Switzerland). The common trend in major countries’ inflation itself explains about two-thirds of the average rate. So the overall impact of Chinese export price inflation on global inflation is around 13%.

And if it starts doing so in coming quarters, fixed-income markets are not prepared or priced for it, even after the recent spasms. Global bond markets have had an inauspicious start to 2018 with yields rising across all developed markets. The recent sell-off in equities caused markets to question pace of Fed rate rises in 2018. The US FOMC members still predict an orderly tightening of rates in 2018 and for now, the market agrees. The risk/reward is tilted towards bets on accelerating inflation and rising yield spreads.

Original Article


ET Markets


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