Of the markets in Asia, two stand out more than most: India and China, with the race for being the jewel in the Asian crown pitting the two against each other.
Head to head
In 2012 it was India’s equity market that finished the year in the ascendency, having knocked the other BRIC countries into a cocked hat after appreciating in monetary terms by over 15%. However, it wasn’t plain sailing, and while not losing faith in India’s enormous growth and long-term potential, China is proving a strong contender for top dog in 2013.
There are many levels on which to compare the two countries. However there are certain areas of focus that, with due consideration, can give investors a greater insight as to which country might come out ahead in market performance terms by Christmas.
Starting with growth, China has flourished in previous years, so its recent slowdown should come as no surprise to investors who understand the importance of the measures needed to ensure the country’s long-term sustainability. A move away from a boom and bust trajectory to slower growth is vital for China’s future and there should be little alarm about a drop in GDP. In fact, the overall outlook for China, in terms of growth, still outstrips India at 7-8% p.a. compared to 5-6% p.a. forecast for this year.
Meanwhile, almost 60% of incremental growth in India is fundamentally driven by consumer services.
India enjoys an enormous population of young individuals that are ready to work and it is estimated that there will be a further 300 million people joining the workforce over the next 20 years. Providing education and employment opportunities to these individuals will be integral in securing long-term growth. Alongside this the cost of labour is low compared to other countries, signifying another cost advantage for India, where income per capita is $3,851. This is in contrast to China, where income per capita is $9,161 and huge challenges face the country to overcome its peaking and ageing population.
The ‘one-child policy’ is partly to blame and potentially a real barrier to growth, as one family member (the only one who is contributing to the economy), becomes increasingly responsible for the care and welfare of older generations too. However, there are promising signs in China to combat this problem and the recent presidential election indicates there may be a relaxation to this policy.
On a number of other political issues there is a strong impetus for change and the new leadership has signified a new era in Chinese politics.
Many new members of the Politburo are much younger, educated in the West, committed to reform and much less tolerant of corruption. In contrast, India requires more consistent consensus from its democratic government, where the political persuasions and economic outlooks for different states vary widely.
Shared consumption drivers
It is clear that for investors there is no one clear winner between the two countries. Where one excels, the other quite simply fails.
However, one interesting similarity is that consumption is a significant driver of growth, albeit not yet properly developed in China. Recent results from British luxury brand, Burberry, show sales to the Chinese are high, demonstrating one example of how western brands are benefitting from increased demand from emerging market consumers. Added to this, there has been a marked change in spending habits among the young population. In India, consumption is also driven by the enormous and aspirational population, but a lack of infrastructure poses a significant threat to this continuing due to its detrimental impact on inflation.
India for example is self-sufficient in food with 95% of its consumption being produced domestically. However, a poor infrastructure means that at the moment many goods cannot get to the market or store quickly enough and they spoil.
Over $480bn has been spent on infrastructure in India over the past five years but remarkably there are still 350 million people without electricity. Infrastructure in India is clearly a problem though progress is being made and some $1trn is planned to be spent in the next five years.
Both countries offer compelling growth stories and have enjoyed a meteoric rise in the past ten years, from developing economies to next generation superpowers. However, investors must consider the obstacles to growth and the risks that are associated with the returns. In India a poor infrastructure and a patchwork quilt of politics; in China uncertain political reform and a tight-controlled capital market, which are disincentives to foreign investors.
As ever, the race continues and it will be interesting to see at the end of 2013, who takes first place.