By Darius McDermott, managing director of FundCalibre
China and India are the twin behemoths of emerging market investment. Together they make up almost half of the MSCI Emerging Market index. Their fortunes also have an impact on emerging markets more broadly – commodity demand from China will impact Brazil, for example, while Indian growth will impact South East Asia.
Their stockmarket fortunes have diverged significantly in recent years. In US dollar terms, the MSCI India index has delivered an average of 11.3% every year for the past five years, while the MSCI China has dropped by an average of 3.3% per year. 2024 was the first year of positive returns for the Chinese market since 2020.
Their economic performance is optically similar. China’s GDP grew 8% in 2021, 3% in 2022, 5.2% in 2023 and 5% in 2024. India, which starts from a lower base, saw its GDP contract 5.8% in 2021, but then rise by 9.7% in 2022, 7% in 2023, and 8.2% in 2024.
Nevertheless, the underlying picture for the two countries has been very different. Chinese growth has been depressed by deflationary pressures, a weak consumer, and a fragile property market. It has been supported by its manufacturing base, but this has come under threat from mounting geopolitical tensions and the threat of tariffs from the US.
In contrast, the Indian economy has had real momentum. The Government’s Production Linked Incentives (PLI) scheme has helped bring in global companies. Apple, for example, made around 15% of its iPhones there in 2024. India has demographics on its side, with a young, dynamic population. The Modi government, despite its wobble in the parliamentary elections, has continued its reform agenda with investment in infrastructure and the property market.
However, in recent months, this narrative has started to change. India has seen some weakness. Higher inflation has hit consumption, particularly in urban areas. Between July and September, India’s economic growth dropped to a seven-quarter low of 5.4%, well below the Reserve Bank of India (RBI) forecast of 7%.
This has been reflected in corporate earnings. Sean Taylor, manager on the Matthews Pacific Tiger fund, says: “There has also been a pullback in earnings growth, which has caused a small correction in the market. The weakness in earnings has been fairly consistent across the board but the main impact has been in the mid- and small-cap space and in consumer segments.” The BSE Sensex dropped around 4% between mid-December and late January.
China, on the other hand, has been showing tentative signs of improvement. The market rallied after the announcement of a stimulus package in September and has largely held onto those gains. Taylor points out that gains were focused on specific areas: “China offshore markets, typically in technology, consumer and e-commerce segments, delivered improvements in earnings growth…The performance of the mainland or A-share market, which includes consumer staples, real estate, industrials and manufacturing, lagged offshore equities.”
Dale Nicholls, portfolio manager on the Fidelity China Special Situations Trust, says: “Recent government stimulus measures signal a strong commitment to addressing economic challenges and improving domestic demand. Though consumer confidence remains weak, our discussions with many companies suggest that the worst of the job cuts may now be behind us, and elevated household savings suggest potential buying power that could support a recovery. Until recently, earnings revisions have trended downward, but we are now seeing improvements.”
Nicholls points out that domestic innovation is thriving, supported by strong investment in research and development (R&D), particularly across areas such as renewable energy, automation, and the electric vehicle value chain. There was clear evidence of this with the launch of DeepSeek, a cheaper rival to US AI models such as ChatGPT.
The wrinkle with China is its geopolitical position. It is directly in the sights of Donald Trump and his new tariff regime. The trade war appears to have started already. Mike Sell, manager on the Alquity Indian Subcontinent fund, says: “We expect that the average bilateral tariff rate facing Chinese goods will likely settle around 35-40%, up from the roughly 15% faced at the end of Biden’s term in office, and higher than the 25% implied by the latest 2 February tariffs.”
However, he says, tariffs should spur a more forceful easing by the Chinese authorities, limiting the hit to growth. While he admits it will be difficult to fully offset the shock, their estimates suggest it should only depress GDP by 1%. The situation should become clearer after the National People’s Congress in March. It is also true that the tariffs may not work to China’s detriment. If the US continues to pursue a policy of irritating its allies, China may find it has a range of friendly new trading partners.
Where does this leave investors? We would suggest that both markets have become more attractive in recent months. India has become cheaper, and the government has put tax cuts in place. Sell adds: “This change will deliver a meaningful stimulus to Indian consumers’ ability and willingness to spend. In our view, this tax change will provide a big boost to companies operating in the consumer discretionary sector.”
“The government remains committed to its strategic focus on infrastructure investment and capital spending, preserving the strong momentum it has built over recent years.” Growth may have slowed, but is still among the highest in the world. And with low GDP per capita, India has a significant runway of growth. “The latest budget announcements reinforce our optimistic outlook on India’s already compelling investment case,” Sell concludes.
In China, valuations are still cheap, but the broader economic situation and sentiment appear to be improving. Nicholls believes there are real opportunities emerging in the consumer segment. “In e-commerce, despite economic challenges, the largest platforms continue to leverage natural network effects and improved cost control, leading to strong earnings growth this year. Attractive structural growth also exists within the consumer discretionary space.”
“More broadly, investments in areas like travel, education, consumer finance, and insurance offer strong structural growth prospects with significant potential upside when consumer sentiment improves.”
Investors don’t have to choose India or China. For different reasons, both markets look more appealing than in their recent history. There are risks in both countries, but they are both hotspots for growth, and capable stock pickers should be able to make hay.