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Global History - Top 7 economies and how they impact markets

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Global History - Top 7 economies and how they impact markets

How do you judge the top economies in the world? One way would be the market cap of the bourses. That would be too market oriented. A more fundamental way to judge economies would be in terms of their Real GDP. The table below captures the Top seven economies in the world based on real GDP as estimated by the IMF for Calendar Year 2019 along with the projected GDP growth for the year.

EconomyReal GDP ($ trillion)                 Growth in GDP (%)                 
United States$21.51 trillion2.50%
Republic of China                 $14.25 trillion6.30%
Japan$5.23 trillion1.11%
Germany$4.22 trillion1.80%
United Kingdom$2.98 trillion1.40%
India$2.94 trillion7.40%
France$2.93 trillion1.71%

Data Source: IMF

Of course one can argue about whether India has already crossed the UK but that may be more of academic interest. At the current rate of growth, India will only be widening its gap over the UK and France over time, although it may take few more years for India to get closer to Germany. How do the economies of these countries impact the global capital markets?

United States still holds the key to global growth

With an annual GDP of $21.51 trillion and a market cap of $30.44 trillion, the United States accounts for over 1/3rd of the global market cap of $88 trillion. The reason the US has such a healthy ratio of market cap / GDP is that nearly 80% of its output comes from highly developed and technologically advanced sectors. The US continues to be the fulcrum of the global economy as it is still the world’s largest consumer market and substantially inward looking

China remains the engine of global growth

For a country with annual GDP of $14.25 trillion, China has a market cap of just about $6.32 trillion. Hong Kong by itself has a market cap of close to $4 trillion but that is substantially double counting of Chinese companies. With a 6.3% annual GDP growth on a GDP base of over $14 trillion, China remains the largest contributor to annual accretion to GDP. Market cap had touched a peak of $10 trillion in 2015 but has since tapered due to factors like weakening growth, a major problem of shadow banking and the ongoing trade war with the United States.

Japan remains the safest currency to park funds

Japan recently saw its market cap cross the $6 trillion mark and even briefly overtake that of China. Since Shinzo Abe embarked upon his easy liquidity policy some 7 years back, Japan has seen unprecedented wealth creation in the markets. With dollar reserves in excess of $1.25 trillion and a permanent current account surplus, Japan remains a formidable player and the Yen remains a preferred currency in times of economic turmoil.

Germany drives the EU and will continue to do so

Germany has one of the lowest ratios of market cap to GDP of just around 51%. For an economy that is substantially larger than India, its market cap has actually fallen below that of India. But with an annual export basket of $1 trillion, it remains the world’s second largest exporter after China. Also the perpetual trade surplus that Germany runs has helped the country become the pivotal player in the European Union

UK could be under pressure due to the BREXIT outcome

The UK economy was consistently growing at the rate of 2.8-2.9% between 1999 and 2008. Post the Lehman crisis, the economy shrunk by 6% in 2009 and has grown at a much lower rate. Its annual GDP and the market cap are approximately at the same level as India but UK derives a lot of clout for being the gateway to European markets. With BREXIT, London could lose its pre-eminent position and also the economy could shrink, as the Bank of England has projected.

India could be the big story of the next 30 years

Even as the markets welcomed the new NDA government with a vote for a stable five years, India’s market cap remains at less than 70% of the GDP. From that standpoint, India still has room for markets to outperform, notwithstanding worries about P/E ratios. With the economy sustaining over 7% growth on a GDP base of nearly $3 trillion, that is a lot of flows being generated annually. It is hardly surprising that FPIs continue to love the Indian markets.

France will continue to play second fiddle in the Euro region

France did come out of the financial crisis appreciably but that was more because 70% of the French economy GDP comes from the services sector. However, France will continue to be the key in the global sweepstakes due to being the second largest economy in the Euro region and a strong industrial base in automobiles, pharmaceuticals and aerospace.

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