According to FE Analytics, the MSCI China index has rallied 332.98 per cent over the past 10 years and massively beaten the gains of developed market indices such as the FTSE All Share, S&P 500 and MSCI Europe ex UK.
Performance of indices over 10yrs
Source: FE Analytics
But Austin Forey, manager of the £1.2bn JP Morgan Emerging Markets Investment Trust, says while the prospect for returns from China’s equity markets is looking meagre at the moment, India is presenting plenty of opportunity.
“We’re significantly overweight India and we find many companies that we like, given their capitalist system and open economy. Many businesses are shareholder orientated. Our list of potential targets is long given their large capital markets. We’re naturally inclined to be heavily invested there,” he said.
“Secondly, India has been through a fairly protracted economic slowdown, which was reflected in equity valuations, making the market look attractive to incremental buyers. We added to our exposure in 2013 for example, not with a view to anticipating the election outcome, but with awareness that uncertainty prior to an election might have weighed on stock prices.”
“The market’s positive reaction to the results validated that positioning. The outlook for the Indian government is positive, given their attempts to mitigate bureaucracy and implement needed reforms.”
Indian equities have rocketed up since the election last year of the pro-business reformist Narendra Modi.
Voters handed Modi a landslide victory after he pledged a host of economic and business reforms, mostly aimed at stimulating the economy, fighting corruption and opening up capital markets to foreign cash.
The MSCI India index was the standout performer in both developed and emerging markets last year, having gained almost 50 per cent since the beginning of 2014.
Performance of index since 2014
Source: FE Analytics
India is currently the 10th largest economy in the world, but on a per capita income basis it ranks only 142nd. However, Forey says as the reforms play out, markets will continue their upward trend.
“In terms of the valuations for Indian equities, multiples on our holdings vary. The Indian market index is on a mid-teens P/E ratio, which is relatively reasonable,” he said.
“On a 10-year view, the country may be one of the fastest growing in emerging markets, providing a solid backdrop for corporate growth. Successful companies can grow their market share and improve profitability for shareholder benefit regardless of the macro backdrop.”
“Consider that India is a democratic capitalist society and factor that into growth prospects. Some examples of our long-term holdings include Housing Development Finance Corporation, Tata Consultancy and ITC (India Tobacco Company).”
He says the picture is more unsettled for the other emerging markets thanks to weak commodity prices and slowing growth.
“It’s true that EM as an asset class has had a difficult time recently with mediocre returns. By relative comparison with the US, where the economy is recovering, it looks challenged. Earnings from EM have also disappointed. If we look at the source of profits, we can understand that the industry mix in EM is differentiated from developed markets.”
Standard Life Investments also believes that India could overtake China as the fastest growing Asian economy, if the new government successfully implements its structural reforms.
Alex Wolf, emerging markets economist at the asset management house, says India is Asia’s new tiger economy.
“India now appears to be at the start of a cyclical recovery due to the confluence of three favourable factors: falling commodity prices, the start of an interest rate easing cycle, and the government prioritizing economic reforms. The government’s current incremental approach to reform will boost potential growth, but a larger and more sustained improvement will require deeper reforms,” the economist said.
“India faces a once in a generation fork in the road. The government needs to improve the education system, reduce labour and land restrictions, modernise the power industry, improve infrastructure, and encourage greater foreign direct investment.”
However, Wolf caveats his prediction that India could boom as China did 10 years ago by saying that the stock market gains could start to falter if reforms are unsuccessful.
“If internal opposition and intransigence at all levels of government cause the reform movement to slow and stall, then India will fail to meet its potential, with serious implications for social stability, the region, and also for global investors, who have started to buy into the growth story,” he cautioned.
“Modi will need to shift his focus from improving bureaucracy to changing India’s growth model fundamentally. Due to the rapid rise in the country’s working age population, India will also need to create an additional 10 million jobs per year to absorb the growing labour force.”
“Modi will need to shift his focus from improving bureaucracy to changing India’s growth model fundamentally. Due to the rapid rise in the country’s working age population, India will also need to create an additional 10 million jobs per year to absorb the growing labour force.”