America looms large on the financial world. While in the realm of geopolitics and even geoeconomics, there is much talk about multipolarity-that is not the case for capital markets. America has half of the world’s market capitalisation, even as it has a quarter of world GDP (and a sixth of world GDP when adjusted for cost of living.) All this for a population that is around 4% of the world.
India on the other hand has more than a sixth of global population, and only about 4% of the market cap. China with a similar population share and a much bigger economy, does only somewhat better even if one includes Hong Kong and takes out the redundancies. Europe is stagnating for now, and Japan is at best a value investor’s playground, not a growth one.
Much of this exceptional American success can be attributed to it being a largely welcoming society with its now-famous melting pot, a great secure geography with massive natural resources, a mature if turbulent democracy and a system that broadly respects hard work and merit. Yet time and scale have been the real secrets of America.
Growth, peace, and the magic of compounding for generations allowed America to take the crown from its Anglo cousins in England and see off competitors from Russia to Germany to Japan.
But just like America today has almost as many people as Russia, Germany and Japan combined, both India and China have more than four times the number of people as America. Both India and China got modern administrative states with relative domestic peace less than eight decades ago. By then, America already had eight decades of growth after its Civil War starting off an already high per capita base.
China is ahead of India in overall development by two decades at most, but there are doubts about peaceful transfer of power in its communist autocracy, especially after the collective leadership model has been junked. India, while a young though robust democracy, is only now beginning to provide basics-electricity, drinking water, higher education, healthcare, expressways, metros-with still a long way to go.
The US on the other hand has mega-billionaires shooting for Mars and is heralding rapid developments in AI and quantum computing. Are others doomed to be digital-financial neo-colonies this time?
Not so fast. We must always be wary of conflating cyclical trends with structural ones. We will briefly explore both.
Part of American exceptionalism today is just the dollar being at a cyclical high against a basket of currencies and after adjusting for cost-of-living changes. The dollar has had three full cycles since the closing of the gold window by Nixon in 1971. The first one (dollar down, then up) lasted till 1985. The second one till 2002, and the third one-I am positing-till around 2025.
Focusing only on the half-cycles where the dollar appreciated, the first one was 1978 to 1985, which culminated in the Plaza Accord where Reagan cajoled the Europeans and Japanese to appreciate their currencies. The second one was from 1995 to 2002, when emerging markets, led by China, began growing fast. Both these up-cycles were for seven years or less. The third dollar up-cycle, if it ends in 2025, would have lasted 14 years (began in 2011)-twice as long.
The dollar then is already on borrowed time, but cyclically not structurally (which is the mistake many US perma-bears also make, in a mirror image of the perma-bulls). Shale, Covid, Ukraine, Artificial Intelligence-there were a bunch of reasons why this half cycle lasted much longer. And while the past rhymes and does not repeat (hence economics must rid itself of its physics envy and study history more), patterns matter.
More structurally, Trump’s incoming team has already linked any easing on potential and existing tariffs to the Chinese appreciating the RMB (Mar-a-Lago accord, it is being called, with the nomenclature being unfortunate as Xi would not be seen as bending the knee.) While that is easier said than done, given Plaza’s historiography with respect to the Japanese bubble and China’s own internal dynamics, ultimately only that would be a sustainable solution.
Coming to India, it may be difficult to believe given the USD-INR headlines, but the rupee is at multi-decade broad real highs as per multiple indicators. Indian macro is rock solid, perhaps a tad conservative, and it moved on industrial-trade-manufacturing policy in Trump’s first term and has since refined its policies further.
Under Modinomics, infrastructure investments have been emphasised while India skillfully manages the other great powers in its foreign policy. Finally, Indians are becoming more inter-linked, which leads to a more coherent civilisational state.
The last time the dollar depreciated (2002-11), the rupee in real terms appreciated around 60% against it. But then we had no inflation targeting; now we do. This time around, the rupee is likely to appreciate in nominal terms too-a possibility very few seem to entertain as many of the cyclical contra views on the dollar have been early (aka wrong, including mine.) A rupee that rises optically too would lead to even more foreign flows, on top of the domestic investor pool.
Moreover, Trump’s leverage against India is relatively limited. Delhi, unlike Beijing, has given a near carte blanche to US Big Tech, which is what truly makes American companies "global" as opposed to just "Western". While Indian IT/GCCs also rely on US MNCs, there is no real alternative to India’s deep and cheap talent pool.
Just like China kept parts of US Big Tech out but still dominates manufacturing exports, India’s service exports dominance is not due to the largesse of any one power. On the other hand, software is where Indian talent and capital can rapidly scale up, given the size and growth of the Indian market if prioritised access is given.
In cost-of-living adjusted or PPP terms, the Chinese economy is already bigger than America’s and India is more than half the latter’s size. As the East rises, Asian currencies will also appreciate-structurally as well as cyclically.
China is already dominating the entire EV-solar supply chain, while Indian potential (with already the world’s highest growth rate amongst major economies) should not be underplayed either. All emerging and frontier markets are currently struggling, but the cycle will turn soon-this time led by India and Southeast Asia.
American exceptionalism will not die any time soon-a country that can produce both SpaceX and Saturday Night Live should not be bet against. But there will be two more giants on the global stage, and faster than current linear extrapolations suggest.
Views are personal. The author is Harsh Gupta Madhusudan, Fund Manager, Ionic Wealth by Angel One.
