Investing in Asia's potential growth markets: India and China
Authored by Mohit Ralhan, Chief Executive Officer, TIW Capital
Asia's ascent as an economic powerhouse has been one of the most significant shifts in the global economy over the past few decades. The rise of China and India has played pivotal roles in reshaping the world's economic dynamics. The two countries combined account for 35 per cent of the global population, which in turn has contributed to their rapidly growing consumer bases. This, combined with ambitious economic reforms and investments in infrastructure, has led to sustained economic growth that outpaces many other regions. The IMF estimates that China and India combined will account for 50 per cent of global growth in 2023. Asia meanwhile will account for 70 per cent of global growth.
The growth momentum is expected to continue as India is expected to overtake Japan by 2030 to become the third largest economy while China’s economy will be within striking distance of the US, up from 70 per cent in 2022. While demographics are expected to be the main driver for India’s growth, China’s growth will be driven by innovation and increasing worker productivity.
One of the pivotal factors behind India's investment appeal is its newfound stability. The nation's enhanced business and political stability have bolstered its credibility among sovereign investors. This confidence directly results from India's proactive approach to addressing structural concerns and creating a conducive environment for investments to thrive. Measures such as the reduction of corporate tax rates and the liberalisation of foreign direct investment norms have collectively propelled India's ranking on the Ease of Doing Business index. These reforms have fostered an environment where businesses can flourish with relative ease.
India's implementation of production-linked incentive schemes has been pivotal in attracting foreign investment across manufacturing. Meanwhile, the country’s demographic dividend, characterized by a large and youthful consumer market, coupled with a skilled workforce, is an investor's dream. This not only drives consumption-driven growth but also presents avenues for innovation and entrepreneurship. Moreover, as Western countries explore alternatives to set up manufacturing facilities in China, India has emerged as a preferred destination. The confluence of a large and cheap labour force positions India as a formidable challenger in the quest for a China-Plus-One strategy.
India's ascendancy is reflected in its increasing weight within the MSCI Emerging Markets (EM) index. From a modest 8% till October 2020, India's weight nearly doubled to 16% in November 2022. This surge underscores the growing prominence of Indian equities on the global stage and the heightened investor interest in the nation's growth story.
While India has garnered attention with its remarkable growth. China, a traditionally strong contender, has experienced a degree of disappointment among global investors. The rapid growth spurt that followed the easing of Covid-19 restrictions dissipated fast, leaving investors sceptical about the nation's long-term growth trajectory.
Perceived weaknesses in productivity growth and concerns surrounding an ageing population have cast shadows on China's medium-term growth prospects. However, it's crucial to recognize that while challenges exist, policymakers have not been passive in addressing them.
One of the avenues for growth enhancement is through innovation and new technologies. China's focus on nurturing a culture of innovation and supporting tech companies under its ‘Make in China 2025’ program is a testament to its commitment to staying at the forefront of global technological advancements. Furthermore, the challenge posed by an ageing population is being tackled by abrogating the ‘Single Child Policy’.
The IMF suggests that if China undertakes more such reforms, the nation could achieve a long-term growth rate of 4.4 per cent, a figure considerably higher than the projected growth rates of advanced economies (China should be looked more like an advanced economy given that its per capita income is near the threshold of ‘high-income status’). Unlike export and investment-led growth witnessed in the previous two decades, this would lead to better quality growth which would be self-sustaining in nature.
In the realm of investment, valuations often provide insights into potential opportunities. China's equity market, as measured by MSCI China, is currently trading at a forward price-to-earnings (P/E) ratio of 10.2x. In comparison, U.S. stocks stand at a significantly higher 19.4x, nearly twice China's multiple. Historically, U.S. stocks have held a consistent premium over Chinese equities, typically around 4.5 points. However, the present gap is almost double the historical average, indicating that Chinese equities could potentially offer investors an attractive entry point. The policy measures aimed at sustaining growth, combined with favourable valuations, present a compelling case for those willing to look beyond the immediate noise and position themselves for the future.
India and China hold immense promise for investors worldwide looking to capitalise on the opportunities presented by their rapidly expanding economies, burgeoning middle classes, and innovative ecosystems.
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.