India and China are the two emerging market heavyweights that every serious investor needs in their portfolio, but they’ve had clashing fortunes in 2023.
While the Indian stock market has powered ahead, China has trailed.
Impossible to ignore, essential to hold, these two economic giants look like the future, but are likely to remain volatile as they battle to fulfil their potential.
You know you have to invest in them, the only question is how much exposure you need.
The MSCI India Index, which measures the performance of the large and mid-cap segments of the Indian market, rose 5.79 per cent in the year to October 31.
MSCI China fell 11.24 per cent over the same period.
The difference between individual fund performance has been even starker. Specialist investment trust India Growth Trust has soared 31.28 per cent year to date, while JP Morgan China Growth & Income has crashed 31.94 per cent.
The Indian economy has been buoyed by strong economic growth and Prime Minister Narendra Modi’s business-friendly reforms, says Dzmitry Lipski, head of funds research at Interactive Investor.
China, meanwhile, has been hit by concerns over its sluggish real estate sector, amid the bankruptcy of property company Evergrande Group and contagion concerns, Mr Lipski adds.
So much for the recent past. What about the future?
India’s success is no flash in the pan. The MSCI India Index has delivered an average annualised return of 11.84 per cent a year for the past decade, against just 1.19 per cent for the MSCI Emerging Markets Index and 0.98 per cent for China.
Yet, there’s a risk in being backward looking, Mr Lipski cautions, as India’s stock market looks relatively expensive as a result.
As one of the world’s largest energy importers, it is also vulnerable to a rising oil price if the Gaza war worsens.
“Morgan Stanley recently warned that sustained oil prices at $110 per barrel could destabilise India's economy and potentially force the Reserve Bank of India to restart its rate hike cycle,” he says.
That isn’t an immediate concern, with Brent crude falling to about $81 at the time of writing.
Other measures show that India is on the rise, with the latest International Monetary Fund forecasts showing the country’s economy will grow 6.3 per cent in 2023, up from its earlier forecast of 6.1 per cent, Mr Lipski notes.
“India’s market capitalisation passed the UK and France earlier this year. It is predicted to become the third-largest economy by 2028, overtaking both Japan and Germany,” he says.
The Indian economy is fundamentally driven by domestic consumption, which accounts for about 60 per cent of gross domestic product, whereas China is export-led.
Mr Lipski says India’s long-term investment story is difficult to ignore, as it offers a diverse range of companies with good fundamentals and untapped growth potential.
Don’t write off China, though. After the recent sell-off, it could be in a better place, he says.
“The economic backdrop remains positive as the government showed that it is prepared to stimulate the economy through interest rate cuts and the Chinese consumer is expected to bounce back,” Mr Lipski says.
Share valuations look cheap by historical measures, boosting the risk-reward ratio.
“As China’s economy continues to mature and become more open, government policy will evolve, and any short-term sell-offs can create buying opportunities for long-term investors,” he adds.
The long-term investment case remains intact, as the middle class grows and the economy shifts towards domestic consumption.
Investors are arguably underexposed, Mr Lipski points out.
“China currently represents nearly 18 per cent of world GDP but only 3 per cent of world market capitalisation. Over time, this gap should close and Chinese markets are likely to take up a significantly larger share of major equity benchmarks,” he says.
Henry Ince, investment analyst at Hargreaves Lansdown, is a little wary about India today.
“The recent rally has raised questions about valuations and some fund managers admit it's become challenging to find appealing opportunities,” he says.
“Now is not the time to be overweight on India, given how well it’s done relative to other Asian and emerging market countries. So remain diversified.”
The recent meeting between US President Joe Biden and Chinese President Xi Jinping has helped to reduce “the geopolitical premium embedded in the price of Chinese assets” by easing tensions between the world’s two superpowers, which may change investor attitudes, says Raphael Gallardo, chief economist at fund manager Carmignac.
Monica Defend, head of Amundi Investment Institute, warns that additional fiscal stimulus will not reverse the trend to lower Chinese growth, which it forecasts will fall to 3.9 per cent in 2024 and 3.4 per cent in 2025.
India offers brighter prospects with anticipated growth of 6 per cent in 2024 and 5.2 per cent in 2025, she says.
Both look more promising than the West, though.
“The growth differential between emerging and developed markets will reach a five year-high. India will grow faster than China,” Ms Defend says.
So, how to invest?
For most people, funds are the safest way in, although not without risks of their own.
The simplest option is a low-cost exchange-traded fund, such as the iShares India MSCI ETF, which is up 8.35 per cent over one year and 48.86 per cent over five.
The iShares China MSCI ETF is up 4.57 per cent over one year, but down 21.7 per cent over five.
However, actively managed funds have done better. Mr Lipski tips Stewart Investors Indian Subcontinent Sustainability Fund, up 7.91 per cent over one year and 81.79 per cent over five.
He suggests adventurous investors could try the KraneShares CSI China internet ETF, which provides exposure to Chinese tech companies listed in the US and Hong Kong. It’s up 17.22 per cent over one year, but down 35.39 per cent over five.
Alternatively, investors could capture both countries within a broader emerging markets fund such as the Pacific Assets Trust, which is 46.4 per cent invested in India and 12.04 per cent invested in China and Hong Kong. It’s up 6.25 per cent over one year and 41.4 per cent over five.
The JP Morgan Emerging Markets Trust has a more even split, with a 24.66 per cent allocation to India and 28.82 per cent to China and Hong Kong.
The larger Chinese allocation may have weighed on recent performance but could capture the recovery. It’s down 0.38 per cent over one year and up 30.99 per cent over five.
China/India is not an either/or decision. Most investors need exposure to both. Now could be a good time to get it, but for contrasting reasons.