According to Jason Hollands from Tilney Best Invest, China’s “imitation of capitalism”, is one of the major reasons for China’s current economic challenges. It has propped up inefficient businesses and avoided the healthy cycle of defaults that would occur in a true market economy, allowing overcapacity to build up, creating a potential deflationary powder keg, according to Hollands.
“Official policy recognises the need to rebalance the economy away from internal investment and exports, and to develop the Chinese consumer and service sectors instead. But this is a transition which is not a quick fix and will take many, many years,” said Hollands.
Hollands notes that some of the best Asian and emerging market managers are also very wary of China, including Angus Tulloch, whose Stewart Investors Asia Pacific Leaders fund currently has only 1.3% invested in mainland China, compared to an index weighting of 23.5%. “Instead, the Stewart Investors team are putting their chips on the India table, with 23.1% exposure, versus a 7.6% index weighting,” said Hollands.
India is indeed on a roll, as the recent GDP figures would suggest. “Despite the recent volatility in the emerging markets, India remains a bright spot,” said Ajay Marwaha, director of investments at Sun Global Investments.
“Helped by low oil prices, the Indian government has made significant reforms to bring down the deficit and manage inflation. This, combined with the government’s ambition to make India the world’s preferred destination for investment through the opening up of the bond market, has created optimism around India’s growth trajectory,” he added.
There are several reasons for choosing India, according to Georgina Hellyer, global emerging markets portfolio manager at Columbia Threadneedle. First, as a commodity importer and net importer of oil, the country has received a massive boost to its terms of trade lately. Second, it is a great example of a structural growth story. And, as often mentioned, it has a rapidly growing working population. “Historically, it hasn’t reached its potential,” said Hellyer. But its investor-friendly government with a mandate for reform should lead to a “steep change in the growth rate of the Indian economy,” according to Hellyer.
Marwaha remains optimistic. “Higher disposable incomes, increased government consumption and a marginal pickup in investments via capital expenditure give us reason enough to believe that a gradual growth recovery is underway and we expect India’s growth rate to straddle 8% in 2016.”
Damian Testi, an investment manager at Walker Crips, would choose China over India for the foreseeable future, however. “My opinion is based upon the twin factors of geography and bureaucracy. China has established a head start through deploying significant amounts of capital around the world. Over the past five to ten years, China has clearly aimed to capitalise on a diversified portfolio for the future. Meanwhile, India is advancing structurally, but is still a number of evolutionary steps behind China. In the long term, demographics favour India, but in the nearer future China has built a dominant position on the monopoly board of global assets,” he said.
