In 2017 the Indian economy had recovered from a short term slump to produce growth for the year of 7.1%. We think that the Indian economy will grow by 7.3% in 2018. This growth will be followed by slightly stronger growth of 7.4% in 2019. It is notable that in 2017, 2018 and 2019 India will have grown faster than China in each of these three years.
The reason that India is now outperforming China and will continue to outperform China is because of faster growth in the Indian labour force. The Indian labour force is on average much younger than the Chinese labour force. Its growth can continue to outstrip that of China for decades to come. In the long run of history, India will have a much larger economy than even that of China.
Indian inflation was 3.6% in 2017, we believe this will rise to 5.1% in 2018 before falling to 3.9% in 2019. The inflation target maintained by the Reserve Bank of India is 4.0%. A rise above that level produces a rise in Indian interest rates which then puts downward pressure on Indian inflation in the following year. This stability of the inflation target will do much to support an increasing international market in Indian debt over coming years.
Australians don't look closely enough at the healthy economic performance of Australia's nearest neighbour. The Indonesian economy grew by 5.0% in 2017. We think it will grow by 5.1% in 2018 and 5.1% again in 2019. With this kind of sustained growth rate, Indonesia is expected to become a G20 economy in the decade of 2020s. Our nearest neighbour will become much more influential in coming years.
Indonesian inflation appears to have stabilized at the level not far below that of India. Indonesian inflation was 3.8% in 2017. We think Indonesia will have an inflation rate of 3.6% in 2018 and 4.0% in 2019.
The closing months of 2018 have seen a sell off of US equities which has in turn generated a correction in the Australian equities market. We think the selloff in US equities has been the result of a slowdown in US earnings growth as the positive effect of corporate tax cuts begins to remove itself from the momentum in US earnings.
We think that the fair value for the S&P500 is now 2768 points. This is 166 points higher than the level of the S&P500 on 17 December of 2602 points. We believe that the S&P500 can sustain a rally back to fair value in the early months of 2019.
We think that fair value for the ASX200 is now 5962 points. This is 375 points higher than the level of the ASX200 on 17 December of 5587 points. This means that the ASX200 is some 375 points below fair value. We also believe that the ASX200 can sustain a rally back to fair value in the early months of 2019.
The world economy will continue to produce healthy growth in 2019. We are ending 2018 with equities markets that are undervalued both in the US and in Australia. 2019 has the capacity to produce a year both in the economy and in financial markets that is better than we expect.
This article was first published by Morgans.
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