"...emerging markets will grow faster than the
developed world for decades to come."

Gideon Rachman, The Financial Times

China and India: Two giants you can’t ignore

China and India: Two giants you can’t ignore

The meteoric rise of China and India as economic superpowers has permanently changed the global investment landscape. Though still considered emerging markets, both countries have become dominant forces in the global economy, offering an abundance of investment opportunities in a myriad of sectors.

Collectively referred to as Chindia, these giants are not only the two fastest growing economies in the world but are also ranked No.1 and No.3, respectively, in terms of size measured by Purchasing Power Parity (PPP), with China replacing the United States in the No. 1 spot last year.

The sheer size of China’s and India’s increasingly wealthier population is also a force to be reckoned with. Together they have a combined population of almost 2.7 billion, representing 36% of the world’s total.

When China sneezes the world catches a cold

China is expected to grow at a pace of 6.8% in 2015, down from 7.3% in 2014. Its’ growth is expected to decline by another 0.5% in 2016 but it will still remain one of the fastest growing economies in the world, well ahead of all major developed countries whose average growth rate is forecasted by the International Monetary Fund (IMF) at 2.0% in 2015 and 2.2% in 2016. [i]

In spite of its slower but yet strong growth, alarm bells have been ringing in the heads of the global investment community which has become accustomed to China growing in the 10% range. The truth is: the decline in growth has put a huge dent in China’s global demand, particularly for commodities, causing the world to catch a cold when China sneezes.

Incidentally, the pause in Chinese growth is largely due to government efforts to rebalance the economy. The country’s 12th Five-Year Plan (2011-15) had set in motion the current “Chinese model” of growth which encouraged a shift away from the traditional investment-led model to one that is consumption-led. It sought to leverage the demand-side of the growth equation, taking into consideration urbanization, rising per capita incomes, and the growing appetite of a new middle class for consumer goods.

In 2013, the government introduced additional layers of change, covering a range of economic reforms that focused on state-owned enterprises. At that time, Chinese leaders declared that markets must “play a decisive role in allocating resources.”

Then in 2014, the government’s focus shifted to advancing the rule of law and weeding out corruption. However, China’s 13th Five-Year Plan which will be formalized in the first quarter of 2016 is expected to ease international investors into a “new normal” of around 6.5% growth, which is where the country is at present. A 6.5% target would suggest that the Party leadership is serious about pursuing real and painful structural adjustments that would sacrifice short-term growth in exchange for longer term stability.

With this objective in mind, the government would continue focus on rebalancing the economy away from fixed asset investment to consumption and services, initiate more state-led mergers and consolidation within “Old China” industries, focus on “New China” industries in areas such as the environment, health care, education and technology, and broaden the social net to eradicate poverty.

The global investment house UBS is optimistic that Chinese government reforms will continue to have a positive impact on the improving strength of the economy. In a December 12, 2015 comment, it stated: “As we have been expecting, the broad range of government mini-stimulus measures introduced since the second quarter of 2015 is starting to more visibly support growth, as evidenced by the resilience of consumption, ongoing property sales recovery, and firmer infrastructure investment.”

The report adds: “We expect these measures to be further intensified throughout the coming months, including via accelerated fiscal spending and local government bond swaps, additional consumption-supportive measures such as the auto stimulus package, faster and more “hands-on” disbursement of special construction funds for key public works, further relaxation of corporate bond issuance and other financing rules, and the continued guiding down of benchmark rates and SLF (standing lending facility)  “corridor” interest rates. [ii]

India takes a giant leap forward

India, on the other hand, which replaced China as the fastest growing country in the world, is expected to register a GDP growth rate of 7.3% for 2015 and 7.5% in the following year. [iii]

The country’s meteoric rise to prominence was fuelled by the election of the business friendly, Narendra Modi to power in May 2014. Since then, India has become a favoured investment destination largely due to the acceleration in its economic growth, buoyed by comprehensive political, institutional and regulatory reforms; massive infrastructural development; record levels of foreign investment; falling fiscal and current account deficits; declining inflation; a strong currency; and increasing consumer demand resulting from rapid urbanization.

Specific government initiatives such as Make in India to promote local manufacturing; Digital India to reform government systems and empower citizens; Skill India to harness the country’s demographic dividend; the National Institution for Transforming India to identify development priorities; and the plan to build 100 smart cities – have opened the doors to a wealth of investment opportunities.

The government has also made changes in a range of areas, among them: reforms to the energy sector, the Land Acquisition Bill and mining laws; implemented the direct transfer of subsidies; introduced the Goods and Services Tax; lowered corporate taxes; and relaxed foreign exchange restrictions – all of which have had a positive impact on the country’s outlook. Steps have also been taken to improve the primary education and health care systems, increase productivity in agriculture and establish a well-designed welfare and subsidy mechanism.

Demographics favourable to growth

Demographic trajectories are critical to the success of both India and China. In the case of China, the country is experiencing a declining dependency ratio which indicates that those in the work force will face a reduced burden to support those of non-working age. This would result in a sharp increase in spending by the working population, a trend that will benefit the consumer-driven model of the “New China.”

Conversely, India has a demographic dividend. It has one of the youngest and most educated workforces in the world, with a median age of 27 years. In addition, its’ rapidly growing middle class is expected to reach more than 1 billion by 2030, providing the impetus for a dramatic growth in consumer spending and infrastructure development, benefiting both the economy and equity markets.

Secular trends will dominate

The economies of both China and India comprise of multiple sectors and sub-economies. Some have tremendous potential while others are expected to lag in performance. The key is to find secular trends that could potentially dominate and produce strong returns.

In China, “New China” industries in areas such as the environment, health care, education and technology are expected to do well while sectors such as financials, industrials, consumer discretionary, and mobile technology should outperform in India.

Leveraging the Chindia Opportunity

The Excel Chindia Fund is the only mutual fund of its kind in Canada, which invests in both India and China in a single fund. It is managed by Excel Investment Counsel Inc. which leverages the on-the-ground expertise of two world class managers: Birla Sun Life AMC Limited and China Asset Management Company Limited.

The Excel Chindia Fund Series A won the 2014 and the 2015 Lipper® Fund Awards for the Best Fund over 10 Years in the Geographic Equity Category.

 

 

[i]International Monetary Fund: World Economic Outlook, October 2015.

[ii]UBS Securities Asia Limited: China Economic Comment, December 12, 2015

[iii]ibid

Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.


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