Interactive Investor

India vs China: the long-term investment case for emerging market nations

interactive investor's head of funds research Dzmitry Lipski comments.

9th November 2023 11:00

Dzmitry Lipski from interactive investor

Emerging market heavyweights India and China have experienced opposite fortunes this year.

The MSCI India benchmark, which measures the performance of the large and mid-cap segments of the Indian market, has risen by 3.8% this year (to 31 October 2023) - buoyed by strong economic growth and business-friendly reforms.

Meanwhile, MSCI China, which captures large and mid-cap representation across the Chinese market, is down 12% over the same period as worries about the nation’s sluggish real estate sector and its economy continue to dominate.

But what is the long-term investment case for both nations? Dzmitry Lipski, Head of Funds Research, interactive investor, explores.

The case for India

Dzmitry Lipski say: “Over the recent years, Indian equities have been one of emerging markets' strongest performers - and it could be argued that their relative valuations no longer look attractive.

“Although in the short term, the Indian market is mirroring volatility of global markets, over the longer term, the outlook is relatively optimistic, given the positive earnings growth (forecast for 15%) as well as the increased pace of business-friendly reforms enacted by Modi's government.

“One more risk worth mentioning is high oil prices. That could be a problem for many countries – not least India which is one of the world’s largest importers of oil. Morgan Stanley has recently issued a warning that sustained oil prices at $110 per barrel could destabilise India's economy and potentially force the Reserve Bank of India (RBI) to restart its rate hike cycle.

“But India’s long-term investment story is difficult to ignore. The Indian market offers a diverse range of companies with good fundamentals that can take advantage of the untapped growth potential. According to the IMF's October update of its World Economic Outlook, India's economy will grow 6.3% in 2023, an increase from an earlier forecast of 6.1%. India’s market capitalisation passed UK and France earlier this year and is predicted to become the third-largest economy by 2028, overtaking both Japan and Germany.

“India’s economy is fundamentally driven by domestic consumption, unlike most other large emerging economies such as China, which are mainly export-led. Private consumption currently accounts for around 60% of India's GDP.

“India is now the world's most-populous nation with 1.486 billion people, passing China in April, according to projections by the United Nations. And it's still growing. The country's biggest asset is its young, vibrant and educated population. As their incomes rise, more young people move to the cities. Their lifestyles evolve as their aspirations grow. It has been estimated that India's middle class is expected to grow from around 50 million today to 475 million people by 2030.”

Fund ideas

“Indian equity market can be extremely volatile and for more risk-averse investors, broader Asian or emerging markets funds that can adjust exposure to the country, are more appropriate to way to invest in the region.

“We like Pacific Assets (LSE:PAC) Trust (over 45% allocation to India), JPMorgan Emerging Markets (LSE:JMG) Trust (25%) and Utilico Emerging Markets (LSE:UEM) (11%), that can adjust exposure to the country, as a more appropriate way to invest in the region.”

For adventurous investors

Stewart Investors Indian Subcontinent Sustainability Fund is a good option for adventurous investors looking for India equity exposure with a sustainability focus. The fund invests in the highest-quality companies run by responsible management teams.

iShares MSCI India ETF (LSE:NDIA) is good option for passive investors. The ETF tracks the performance of an index composed of large and mid-sized companies in India.

“These funds tend to exhibit significant volatility due to its specialist nature, so is more appropriate for higher-risk investors or as part of a diversified portfolio.”

The case for China

Dzmitry Lipski says: “Despite the recent sell-off in Chinese markets, we believe the economic backdrop remains positive as the government showed that it is prepared to stimulate the economy through monetary easing measures such as borrowing rate cuts and the Chinese consumer is expected to bounce back. This should also be beneficial for other regional economies, with millions of Chinese tourists travelling overseas each year.

“For these reasons, the recovery in Chinese equities should continue, considering relatively cheap valuations versus history and other developed markets combined with institutional holdings the lowest in five years, the risk/reward ratio for Chinese equities is favourable.

“As China’s economy continues to mature and become more open, government policy will evolve, and the resultant volatility should be no surprise and short term sell-offs can create buying opportunities for long-term investors.

“The long-term case for investing in China growth story remains intact. Growth of the middle class and the refocusing of China's economy towards domestic consumption are expected to be key drivers of economic growth and the stock market in coming years. As China is increasingly recognised as being a major driver of global growth, investors should consider having exposure to China when building a balanced portfolio. China currently represents nearly 18% of world GDP but only 3% of world market capitalisation.

“China’s share of global equity markets is much smaller than its share of GDP, in contrast to other major economies and it is expected that over time this gap should close, and Chinese markets are likely to take up a significantly larger share of major equity benchmarks.”

Fund ideas

Fidelity China Special Situations (LSE:FCSS) provides broad, diversified exposure to Chinese equities, including 'H' shares listed in Hong Kong and mainland-listed 'A' shares. It has been managed by Dale Nicholls since April 2014. He focuses on faster-growing, consumer oriented companies with robust cash flows and capable management teams. Due to the trust's single country exposure, its bias to small and mid-sized companies and its ability to use gearing, its return profile is likely to be more volatile, making it higher-risk and a satellite (adventurous) holding in a well-diversified portfolio.

“Alternatively, investors could also consider a broader Emerging Markets or Asian fund such as Fidelity Asia, Guinness Asian Equity Income funds or JPMorgan Emerging Markets Trust, which can adjust exposure to China, as a more appropriate way to invest in the country.”

For adventurous investors

KraneShares CSI China Internet ETF USD (LSE:KWEB) provides exposure to Chinese internet companies listed in both the United States and Hong Kong. Chinese internet companies that provide similar services as Google, Facebook, Twitter, eBay, Amazon, etc, are benefiting from increasing domestic consumption by China's growing middle class.”

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