It’s China versus India. Not only the largest, but also two of the most promising emerging market economies.
But who is winning in 2014? And what does it mean for your investment strategy?
Have a look at the two charts below. (Note, the red circle is where the market stands today.)
First, China’s Shanghai index:
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Next, India’s BSE index:
There is no contest here. India’s market index is right on track. It has rallied more than 40% in the last 12 months.
Despite a weak global recovery and some domestic economic headwinds, India has pulled through. Its growth fundamentals are pushing its companies to create great profits.
On the other hand, China has lagged behind. In fact, it’s so far behind that it’s underperforming its own fundamental potential.
So, where should you put your money?
In a growth sense, go for India. Go for the growth companies in India. But go for the growth companies in China too. It’s a market with huge potential.
In a value sense, this is easy: Go for China. Go for cheap and healthy companies.
So what’s going on with China?
There has been a lot of speculation on bigger stimulus and an easing cycle in China. I’ve written before that I believe the government and its central bank will stick to their guns and remain prudent.
The Finance Minister, Lou Jiwei, echoed my belief in his statements on Sunday. He said China won’t make major policy adjustments based on any single economic indicator.
China’s premier, Li Keqiang, also said that China will only give targeted stimulus and will not adopt across-the-board easing measures.
What does that mean?
It means China is at the end of its rope. It cannot stimulate the Chinese economy by simply printing money and letting loose credit supply. ‘Deep easing’ is bad for controlling the overly hot property market. It’s also bad for rationing the oversupplied secondary industries.
China is also changing its energy policies. I’m referring to the ban on high ash and high sulfur coal. If China’s energy policy remains unchanged, a lot of people will die as a result of the pollution. It’s that serious.
So China has to implement structural reform, ‘starving’ out oversupply and investment into the oversupplied sectors. It has to cure the environment too, which is putting extra pressure on industries.
Let me quote you what I recently heard in a conference while in China.
A cement producer asked a government official, ‘Will there be subsidies to help struggling producers in our industry?’
The answer was simply: ‘You will need to cut production and deal with it yourself.’
With that in mind, you should now understand why the Chinese share market is very soft in 2014. There is a painful structural adjustment going on. But this has nothing to do with the long term.
The long term is still about urbanisation and further developing cities in China. That is a very clear long position for investors.
That’s China. Let’s now turn our attention back to India.
Here is a chart on the Indian index and its valuation.
Although India is a little overvalued right now, any correction is likely to be small to moderate.
What is powering the Indian market is high growth. And that is all about economic fundamentals.
We’re talking about urbanisation, the development of its service sectors, rising consumer income, and a strong pickup in manufacturing.
In other words, India is a ‘must have’ in your portfolio.
You can invest into the Indian market indices or directly in Indian stocks. I’ll follow the Indian economy closely in New Frontier Investor.
There is no shortage of hyper growth companies in India. By hyper growth, I mean 100–300% price gains in a year.
I’ve taken a small sample from the 100% price-gain list of stocks here.
Companies in this range offer some stability and consistency in their business models over a relatively longer period.
Because these companies scored 100% price gains in the last year, together they form a portfolio with a 100% price gain.
There are 20 companies in this portfolio.
In terms of sector distribution, you see a clear dominance by manufacturing. We are witnessing the rise of Indian manufacturing. This is much like China 10–20 years ago.
Basic products such as plastic, oil, metals, and paper and pulp are dominating the scene today. You will see India industrialise itself through the creation of these basic industries.
However, there is also the service sector. You can’t neglect that. Ecommerce is a fast growth area too.
In our sample here, we have a film company, a bank, a tourism service company and an education company.
So India will be ‘firing on all fronts’.
This portfolio has an average PE multiple of 21 times. So it’s not terribly cheap, but it’s not expensive either.
A detailed breakdown of the portfolio further tells us India’s manufacturing is at the very beginning stage of taking off.
India is turning out producers for products such as kitchenware, plastics, ceramics, steel, paper and pulp, and power transmission towers. And some of these producers are showing 100% stock price gains in a single year!
China and India are two countries at different stages of development. So it’s not right to group them together.
China has reached a temporary inflection point. Too much secondary industry has brought about deflation in commodities and producer prices.
However, 50% of the population is still stuck in low-productivity agriculture. Agriculture contributes less than 10% of China’s GDP.
Don’t forget China is a socialist regime; it’s a one party system.
Economic theory usually fails to work in an environment where government intervention is as high as it is in China. However, what China is doing now is necessary for its next stage of growth.
China is a value pick, fitting for a longer term investment strategy.
The Indian economy, on the other hand, is beginning to blossom. I’m not ruling out domestic and global risks that can derail that growth. However, the fundamentals are there. We want to see India take on the ‘hyper growth’ track that China once did.
In the past few months, India has started to feel some deflationary pressure.
Industrial production has slowed down somewhat. However, credit flow remains relatively strong, and consumer confidence is high.
In another words, despite some headwinds, India is holding up well.
By simply investing in the Indian market index, you could have made more than a 40% return in the last 12 months. However, there will be corrections to such relentless growth in asset prices. There always are.
That said, the Indian market will continue to be a ‘hot’ place for investors and is worth looking at for high growth and speculation.
Ken Wangdong+
Emerging Markets Analyst, New Frontier Investor
Ed note: The above article originally appeared in Port Phillip Insider.
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