The US, India, China and Russia: economic heavyweights shape up for 2010 - Telegraph
By James Quinn, Dean Nelson, Peter Foster and Andrew Osborn
Published: 8:15PM GMT 26 Dec 2009
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If 2009 was all about recession, for Wall Street, 2010 will be all about recovery. One of the first signs of this will be seen in bankers' pay packets. January will be the month when investment banks such as Goldman Sachs and Morgan Stanley, and the more diversified conglomerates such as Citigroup and Bank of America, release details of what they intend to pay the "masters of the universe".
The publication of those figures willre-ignite the row over rewarding those whom the majority of the population – both in the US and the UK – believe participated in the near-downfall of modern capitalism.
The situation will be exacerbated because, in spite of the economic problems of 2009, many banks have had a stellar year. Fewer competitors, a rebound in the equity markets and relatively easy comparisons compared with a weak 2008 add up to bumper bonuses.
Goldman Sachs will remain the lightning rod of popular anger. It will be interesting to see whether the bonus total exceeds 2007's $20.2bn (£12.7bn) pot, and what the remuneration committee chooses to award chairman Lloyd Blankfein, who picked up $68.5m two years ago. It's my guess that both figures will be around or below those of 2007 – as the bank tries to continue to ease the public mood.
While Wall Street's lobbyists will be working overtime to demonstrate that everything is back to normal, congressmen from both parties will attempt to push through Bills to ensure that the financial crisis does not happen again - and that if it does, the American taxpayer won't be the one footing the bill.
Senator Ron Paul's attempts to audit the Federal Reserve annually may gain traction. And while John McCain's attempt to revive the 1933 Glass-Steagall Act – which would stop retail banks from owning investment banks – may seem far-fetched, it will revive a strain of debate as to what exactly the purpose of commercial banks should be.
On the flip-side of the regulation coin, market enforcement will also be a key theme.
Although 2009 brought us the public confession and conviction of Bernard Madoff, 2010 will just as certainly bring other major names to New York's many courthouses. The Securities and Exchange Commission and the Department of Justice have started to step up their surveillance on a number of insider trading rings, so more big-name hedge fund managers are likely to feel the heat.
The year could also – depending on court schedules – bring the trial of Raj Rajaratnam, the founder of Galleon Group, who is accused of, but denies, being part of a $20m insider trading ring.
From a financial perspective, Wall Street itself will have a good year, as long as the economic recovery continues. The final quarter of 2009 has provided some significant merger and acquisition activity – GE selling part of its stake in NBC, Exxon buying XTO and Berkshire Hathaway's takeover of Burlington Northern – and this will continue as company boards attempt to use returning debt markets to leverage cash that has been burning a hole in many a balance sheet.
Initial public offerings (IPOs) will also be back, as growth companies look to access new capital, and quoted companies look to offload non-core subsidiaries. But what will also be evident is the return of the private equity IPO, with a whole roster slated to float on both the New York Stock Exchange and Nasdaq in the first quarter.
The phenomenon will be part of the wider return of the major private equity houses themselves – who have spent much of the financial crisis trying not to be noticed, and desperately attempting to restructure failing investments.
But with Blackstone and, increasingly, KKR becoming multi-functioning investment boutiques, one of the key themes of the year will be how each begins to encroach on the roles traditionally fulfilled by Wall Street.
As 2010 beckons, buoyed by relatively stable markets, the number of participants looking to take a slice out of New York's ever-lucrative financial pie will increase, be it private equity houses or the growing number of advisory boutiques providing the challenge.
India
When the engines of American and European growth conked out last winter, India dropped down a few gears but it wasn't long before it was going full throttle once again.
That's not to say India didn't share the world's pain. Diamond cutters and polishers in Surat lost their jobs and construction workers on the country's growing number of glass and steel retail malls packed up their tarpaulins and headed home to their villages with their child-labour offspring in tow. India's second richest man, Anil Ambani, became the world's biggest loser when a slump in share prices wiped an estimated $30bn from his personal wealth.
But the country's great Mofussil, its back of beyond, the small towns where almost everyone buys Indian, kept on growing. While headline growth rates crashed from an average 9pc over the past four years to just above 6pc, the industries that serve Indian domestic demand did rather better.
This is the real story of India – not the New Raj of Indian companies such as Tata buying up British icons like Jaguar Land-Rover or the steel giant Corus, but of meeting the fast-rising demands of people away from the major cities who have survived on very little for decades but now want much more.
By May this year, car sales had increased 2.5pc on the previous year, and were up for the fourth consecutive month, throughout some of the worst months for the global economy. By November this year sales were up by 60pc. For two-wheelers, companies such as Hero Honda scored a 32 per cent increase while Bajaj saw sales rise by 84pc on November 2008.
Those companies that embraced globalisation by launching aggressive acquisition campaigns, such as Tata, suffered in overseas markets – its Jaguar Land-Rover takeover appeared to threaten the company at one point – but now appear to be looking outwards again. India's largest business families and its Navratnas – the main public sector enterprises with autonomy to invest – are looking at major joint ventures and acquisitions in Africa.
But it is in India where the greatest opportunities lie - and also the greatest obstacles to every Indian's ambition of one day overtaking China as the world's fastest growing economy. India has a very long way to go to achieving that ambition - some predict it could happen by 2030.
The big challenge to India's growth potential – and one in which is has so far failed – is building a good road network.
To stand any hope of catching China, it needs to spend more than $16bn on roads in the next two years, but the issue of highway construction highlights one of India's biggest challenges: it's a democracy. When China decides to build a road it forcibly ejects villagers from their homes and throws down the hardcore. In contrast, India's officials can rarely acquire small pieces of land for public projects without the mother of all battles.
The result is that crops that could feed the 1.1bn population and ease food price inflation rot on the road long before they reach market, deteriorating in unrefrigerated trucks toiling to hit 30kph. This is why when India's wealthiest man, Mukesh Ambani, the brother of Anil, launched his Reliance Fresh supermarket chain he factored in the need for a fleet of private cargo planes to bypass the country's impossible road system.
The story if India's development is, in many respects, that of every great Indian business: Reliance became India's wealthiest company not by globalising, but first by selling cheap polyester to millions of Indians who could not afford natural fabrics, and then cheap Chinese mobile phones to millions of poor rickshaw-wallahs who wanted a piece of the digital age.
Tata focused on this last year when it launched the world's cheapest car, the Nano, for £1,200 – slightly more than a motorbike – to make car ownership affordable for Indian families who currently travel five to a scooter.
It also launched the world's cheapest ready-to-move-in apartments for £6,000, and has this month revealed the world's cheapest water purifier: the prospect of keeping your family free of water-borne diseases for just £10 – £190 cheaper than the market leader.
India's growth will continue to rise in 2010, but the rate will depend on how quickly it can reach its own people.
China
If television holds a mirror up to society, then it tells you something about contemporary China that the programme that tapped most deeply into the popular imagination in 2009 was
Snail House – a soap opera about the country's sky-rocketing property market.
And concerns about the sudden leap in property prices in China this year – figures for the month to November show prices now rising at an annual rate of 14pc – are not simply confined to first-time homebuyers.
It now seems increasingly clear that after a year of massive fiscal and monetary stimulus, China's wider economy is starting to overheat, with rising property prices merely a symptom of a much deeper malaise.
Alongside the property bubble, consumer prices are now starting to rise again after nine months in negative territory. Headline inflation this year will be close to zero, but economists are worried.
Those numbers point to consumer price inflation hitting 4pc to 5pc next year, a figure that makes the rulers of a still relatively poor country extremely nervous – the student protests of 1989 had their economic roots in popular discontent over high inflation.
On almost any measure – excessive industrial output, money supply growth, fixed asset investment, rising food prices – the warning lights for China's economy are now starting to come on.
If 2009 was the year that China took many of the global economic plaudits, then 2010 is already shaping up as a far more difficult year for policy makers in Beijing.
The concern for many economists is that the mandarins holding the levers of China's command-capitalist economy remain fixated on the idea that 8pc GDP growth must be preserved at all costs.
In an economy where 95pc of GDP growth this year came from investment, this obsession means pumping billions more yuan into roads, railways and power stations, even as inflationary pressure continues to grow.
Chinese banks pumped 10 trillion yuan (£900bn) into the economy this year and they are expected to inject another 8 trillion yuan in 2010. This might appear like retrenchment, but that is still nearly twice the 4.6 trillion yuan of the loans disbursed in 2008.
China's heavy industries – cement and steel particularly – need the boom to keep running at a time when the ability of China's "real" economy to absorb new capacity is constrained by the continued slump in demand for its exports.
It is that same slump – exports are still 15pc down on a year ago – that could also dissuade Beijing from taking another practical measure to rein in inflation, namely allowing its undervalued currency, the renminbi, to rise against the dollar.
Since many exporters are already working on wafer-thin margins, even a 3pc to 4pc rise in the value of the renminbi would put a great many Chinese factories out of business, something that Beijing has already indicated is politically unacceptable.
If export demand doesn't pick up, China will have little choice but to keep revving the engine of government investment to maintain growth levels – a sure-fire recipe for further overheating.
All of which very likely leaves China's leaders facing some very unpalatable dilemmas by the second quarter of 2010, as rising inflation forces a choice between tolerating higher prices, sacrificing growth or allowing the currency to rise.
"Beijing will be walking a dangerous tight-rope in 2010," says Tom Miller of the Dragonomics consultancy in Beijing. "The serious concern at the moment is that they appear to be excessively favouring growth over managing inflation."
The risk is that in trying to steer a middle course, the timidity of Beijing's policy makers will allow China's already risky asset bubbles to inflate to dangerous new levels – far riskier than allowing a moderate slowdown.
Move too slowly to exit the stimulus and Beijing might find that, for all the plaudits its economic crisis management has received this year, it wakes up to a hangover in 2010.
Russia
Russia in 2010 is not the Soviet Union circa 1985. But the challenge is one that would be eerily familiar to Soviet reformer Mikhail Gorbachev: perestroika or restructuring on a gargantuan scale.
There is, of course, one key difference a quarter of a century later. The Kremlin leaders of today, unlike Mr Gorbachev, have scant interest in political reform beyond tinkering with the existing system and suppressing social discontent. Their priority – or so they say – is structural economic reform aimed at curing Russia of its crippling dependence on oil and gas revenues.
Russian politicians have been talking about the need to diversify and modernise the country's Soviet-style real economy for years. Yet they have done little. President Dmitry Medvedev insists that things will be different this time round.
The reason, he says, is simple: 2009 and the global economic crisis gave the world's largest energy exporter the mother of all scares. As oil prices skidded towards the $30 mark, even Vladimir Putin, the country's famously self-confident prime minister, must have felt a little worried. The savage collapse in commodity prices and sharply lower demand for oil was a body blow to the Russian economy. It was a shock to the Russian elite, who had grown complacent after eight straight years of oil-fuelled economic growth.
Russia's economy shrank by 8.7pc, the worst contraction since 1994. Stock indices plunged, factories closed, unemployment spiralled, the Kremlin burnt through a third of its international reserves propping up the rouble, and a consumer boom that had fuelled everything from the housing market to consumer durables and cars hit the wall.
Some of the country's richest oligarchs were dangerously over-leveraged. As they scrambled to meet margin calls and sell off their assets in fire sales, their net worths
tumbled.
Cracks began to appear, too, in many of the grim Soviet-era one-company towns that dot Russia, where the inhabitants are wholly dependent on one enterprise for their livelihoods. As wages went unpaid for months and production ground to a halt, Mr Putin and other top officials had to visit the stricken towns in person to assuage popular anger.
In the end, a recovery in the oil price, coupled with resurgent demand from China, saved the Russian economy. An oil price of between $70 and $80 suits the Kremlin nicely.
It has now started to rebuild its international reserves and the economy is showing signs of life, with growth in 2010 estimated to be anything from 2.5pc to more than 5pc.
Chris Weafer, chief strategist at UralSib Financial Corporation, says the Kremlin's to-do list is nonetheless lengthy. It needs to reduce interest rates and inflation, cut unemployment, get the banks lending again and try to woo foreign investors.
"The feel-good factor has to be restored," says Mr Weafer. "People's expectations are very different from 10 years ago and are very high. They have got used to experiencing regular economic growth, expect it to continue and expect to have European living standards in the next few years."
Upgrading the country's crumbling Soviet-era infrastructure and diversifying the economy with the help of foreign investors should be a priority, he adds.
The headlines for investors have, however, made grim reading in recent months: African levels of corruption; a corporate lawyer, Sergei Magnitsky, dead in prison due to medical treatment allegedly being withheld; and the abrupt exit from the market of French hypermarket Carrefour. Add to that Ikea's complaints of official corruption and bribery and the investment climate looks even bleaker.
To his credit, President Medvedev has become an expert at describing Russia's ills and setting out what needs to be done. Without serious economic reform, says Mr Medvedev, Russia does not have a future.
His tendency to frame the debate in such stark terms is understandable. The world's largest country responds to change slowly and has an army of bureaucrats who like the current setup and are likely to resist reform.
Mr Weafer says foreign investors are looking on anxiously to see if Mr Medvedev can convert his rhetoric into action.
"That," he says, "is the 64m rouble question, and there is a considerable amount of scepticism."
