Over my last 30 years or so of investing in emerging markets I’ve been able to witness the tremendous growth and opportunities presented by the emergence of China as a leading superpower. Under the banner of common prosperity, over this period China has used its massive human potential to become the factory of the world and, at the same time, develop a huge domestic market.
However, over the last few years we have seen through a combination of increasing geopolitical tension and shifting demographics that the risk versus return equation is not as straight forward. Whilst China can still offer huge opportunities, its position as the preeminent emerging market is now under threat from a resurgent India.
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If you compare the May 2023 MSCI Emerging Markets index weighting for both, China is the leader with a market capitalisation of 31% whilst India lags far behind at 14% – this however is about past growth. On the other hand, the demographic profile of India is far better than for China.
Population trends in China should see its population fall to well below 1 billion by 2100 from the current 1.45 billion, while India, having recently overtaken China, will continue to expand to a predicted 1.7 billion+ at the same time. History tells us that well-managed population growth can power overall economic growth.
More recent GDP growth shows India as a clear winner in line with its structural promise – 7.2% in 2023 whilst a recovering China at around 5.4% is a relative laggard. Indian growth will be broader with a strong tailwind behind solid structural investment and growth from the government and the private sector alike, both local and foreign. India also being the largest democracy in the world does not suffer the same political challenges. Conversely, it is a more mature, partly state-directed economic profile that dominates in China, which is struggling to accommodate western expectations.
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Given these disparities, the valuations for the Indian market do not look particularly out of place – it has never been a cheap market to own, but the opportunity is huge, and this has not been a bar to exceptional returns in recent years.
China’s stock markets offer great value and there is still prospect for growth, but the country has already undergone the largest part of its economic shift from an undeveloped, rural-led economy to a more modern, urbanised service economy. As we go through the 2023 reporting season in India, we are seeing strong growth ahead of expectations in many cases, which further reinforces the positive structural outlook for Indian equities.
I believe that in a decade or so, we will look back at 2023 as the turning point for emerging markets. Investors will build their exposure around a strategic core exposure to India, whilst China over time becomes a tactical allocation, buffeted by geopolitical sentiment.
