Can China & India keep growth alive?
Emerging markets
Chinese and Indian equity markets have deteriorated rapidly since their 2007 peak. Despite the credit crunch’s impact on growth and the potential increased political risks, there is a
long-term growth story for both countries.
As global growth slows, the outlook for China and India is uncertain. China is still coupled with the West; exports are 35% of GDP and they fell 2.2% on the previous year. China’s GDP growth is expected to be 7.5% in 2009, down from
almost 10% and India is forecasted toslow down from 7.6% to 5%, although we expect these figures to be revised down even further.
The deteriorating economic environment may be accentuated by the recent terrorist attacks in Mumbai. As David Gait, Indian Equity Manager at First State notes “religious tension haslong been recognised as the single biggest risk for long-term investors in India. The Mumbai attacks are
confirmation that this risk is on the rise”.
Meanwhile in China, the Government needs to create seven million jobs a year to keep unemployment levels in check. But factory closures and resulting job losses have already led to riots. For investors, higher political uncertainty can mean a higher chanceof extreme loss.
Low-margin Asian exporters are suffering from plummeting demand for goods and the risk that Western Governments may increase trade barriers. Annual earnings growth for Asian companies has been revised down from 18% (2007) to single digits today*. Even traditionally growthorientated
managers like Allan Liu, Manager of Fidelity South East Asia, are very defensively positioned in stable industries, like utilities and telecoms.
Long-term growth
Declining oil and food prices will lead to lower inflation in India. Chinese inflation has already fallen to 4% (October 2008). Both countries are stimulating their economies aggressively using monetary and fiscal policy. Lower prices are encouraging consumption: Indian oil demand has
already risen. India and China have announced $500bn and $600bn of planned infrastructure spending respectively. This is vital to the growth of both economies, although funding constraints may threaten the completion of some projects.
Are equity valuations cheap?
With the MSCI China and MSCI India trading on just nine times last year’s earnings and 1.6 and two times book value respectively, these markets are much cheaper than they were a year ago which reflects the short-term uncertainty over earnings. If these challenges can be
overcome, there is still a case for longterm investment. At current prices many fund managers, like First State, arefinding high quality companies trading on attractive valuations.
We recommend First State Asia Pacific Leaders as a way to access both Chinese and Indian equity exposure (currently 35% of the portfolio). For investors willing to bear the risks associated with investing in just one country we recommend First State Greater China Growth and Aberdeen
Global Indian Equities.
Back to top