China and India still with big growth prospects

Graham Smith, Market Commentator, 15 March 2017

Perhaps the persistent focus on America is understandable. With the new government of the world’s largest economy promising substantial changes to taxes and regulation and apparently on the brink of pouring money into infrastructure projects the like we haven’t seen in decades, it might be foolish to ignore the potential.

Peculiarly perhaps, in a world rocked by political upheaval and change, China and India might seem to offer investors some relative calm and stability.

In China, President Xi has recently completed his first five-year term in office and is embarking on his next and final term. China’s economy has not nosedived, as some thought it would as the government changed its focus to rebalancing growth, and fears that high levels of debt could add up to a western-style credit crunch have not come to anything. In fact the economy is proving resilient, growing at an annual rate of 6.7% last year1.

India’s Prime Minister Narendra Modi meanwhile, now deep into his five-year term, remains popular with voters. Even the government’s bold move last November to pull India’s highest value bank notes out of circulation in an effort to clamp down on tax fraud and corruption does not appear to have had much of an effect, either on Modi’s popularity or growth, at least, as yet.

India maintains its position as the world’s fastest growing major economy, expanding by 7.1% in 2016 according to the latest government estimate2.

Both countries appear to remain in the throes of consumption-led expansions, albeit these are not without risks. China’s long economic readjustment is a complex and arguably hazardous one, because it needs to combine the government’s principle of transitioning growth towards domestic consumption at the same time as managing the inevitable overall growth slowdown that creates.

Further challenges remain the amount of debt lurking in the financial system and how to play China’s currency, which remains broadly on a weakening path against the US dollar3.

This latter factor has particular ramifications internationally, all the more so since the arrival of a Trump administration at the White House. A Chinese currency that is too strong risks an undesirable further economic slowdown; too much weakness could trigger US protectionist measures aimed at cheap Chinese exports.

Thus far, China appears to have been managing such delicate balancing acts with aplomb. The economic “hard landing” some have feared has failed to materialise. Bouts of severe volatility in domestic stock markets – notably in 2015 – have been succeeded by much calmer conditions.

The consumer economy appears to be powering along, with positive implications in particular for companies supplying the “new economy”.

Data out this week showed industrial production accelerating in the first two months of the year and nominal retail sales 9.5% higher than during the same period a year ago. Impressively, online sales were up by nearly a third on January and February 20164.

Meanwhile, India’s demonetisation late last year remains a key factor for the short term.  It was sold on the idea that it would affect mostly the powerful and help the poor. There appears to be substance to this, because the withdrawal of bank notes has been followed by a number of social and financial initiatives aimed at helping the poor, farmers and senior citizens among others5.

However, commendable social programmes, which echo  the rise of populist politics seen in the west, could cast doubts over the real impetus behind the business-focused reforms the government was elected on – the type that create wealth and jobs by making real inroads into longstanding problems like bureaucracy and infrastructure bottlenecks.  

Much needed changes, for example, to raise the maximum amount foreign institutions can invest in Indian companies, reform onerous land acquisition laws or introduce a unified national sales tax remain seemingly out of reach6.

Both China and India would appear to have a lot to commend them as destinations for investment. Well-publicised potential hiccups appear to have been circumnavigated well although, equally, structural reforms that were supposed to create the right conditions for even greater, sustainable growth continue to fall behind.

While that gives scope for future upside should these actual reforms comes through, it might just as easily be seen as a sign of continuing disappointment – if three years of a Modi government in India didn’t deliver them, for example, then why should the next two?

Even so, these countries continue to offer strong growth, albeit that opinions are divided on precisely how robust that can be after recent policy initiatives. The IMF has trimmed its growth forecast for India this year in expectation of the delayed impacts of cash shortages and payment disruptions7.

Stock markets seem to be going along with the idea that growth can remain strong – the headline indices in both China and India have gained significant ground so far this year, although it has to be said gains in China follow a very poor year both in absolute and relative terms8.

Investing in China and India has never been more accessible, with a variety of funds catering for investments in both markets individually or as significant parts of a broader exposure to emerging markets.

Examples include the Fidelity Funds - India Focus Fund, an offshore Luxembourg-registered fund, Fidelity China Special Situations PLC, an investment trust listed on the London Stock Exchange and the  Henderson Emerging Market Opportunities Fund, which features on Fidelity’s Select 50 list. Such investments could be used to raise the growth profile of a globally diversified portfolio, an attractive strategy perhaps for an investor with a comparatively long time horizon.

Sources:

1 National Bureau of Statistics of China, 20.01.17

Central Statistics Office, 28.02.17

Bloomberg, 14.03.17

4 National Bureau of Statistics of China, 14.03.17

The Times of India, 31.12.16

6 Center for Strategic & International Studies, March 2017

IMF, January 2017

Bloomberg, 30.12.16


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