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Rathbones: How India could overtake China

16 August 2017

On the anniversary of Indian independence, Rathbones head of asset allocation strategy Ed Smith and head of collectives research Mona Shah explore whether the emerging market could overtake its neighbour.

By Rob Langston,

News editor, FE Trustnet

On India’s 70th anniversary of independence it is clear that the country has become one of the fastest-growing emerging market economies in the world, yet this could be just the beginning.

Some economists have suggested that India could follow a similar trajectory to neighbour China, another emerging market powerhouse and member of the BRIC bloc of fast-growing economies.

Over 10 years, the MSCI India index has returned 114.48 per cent compared with a 151.74 per cent for the MSCI China index, as the below chart shows.

Performance of indices over 10yrs

Source: FE Analytics

Ed Smith, head of asset allocation strategy at Rathbones, said that “on many measures, India looks very similar today to China around the start of the millennium”.

He said: “A large part of China’s explosive growth can be attributed to its accession to the World Trade Organisation in 2001, at a time when new technology was enabling the exponential globalisation of supply chains,” he said. “But India had been a member since 1995 and didn’t reap the same rewards.

“The difference was a Chinese regime obsessed with facilitating investment – Zhu Rongji’s banking reforms of the late 90s; centrally coordinated industrial strategies; streamlining and simplification of taxation and regulation. Meanwhile, India’s bureaucratic sclerosis resigned the nation to chronic underinvestment.”

He added: “Now that prime minister Narendra Modi’s government looks more poised to break free from his country’s administrative lassitude, India may be about to play catch-up.

“We believe the Goods & Services Tax adopted on 1 July, which nullified the previously unnavigable jungle of local taxation, was an important reform milestone.”

Smith said there were a number of reasons why India could overtake China as one of the fastest growing major economies, including: demographics & human capital, physical capital, foreign direct investment, share of global trade and national savings, and household consumption.


On demographics, the asset allocation specialist said India’s working age population today is equivalent to China’s in 2000, but is set to surpass its regional rival by 2025.

He added: “India’s graduate population is much larger than China’s was in 2000 – so there’s less scope for catch-up there – but it has a much lower literacy rate suggesting potential gains from secondary education.”

Smith (pictured) said while India has just one-third of China’s landmass, it had three-quarters of the roads and half the rail tracks, suggesting it might require fewer heavy materials to support its growth.

“Capital formation in India today is on a par with China's in 2000, which went on to increase five-fold,” he added. “If India encourages research and development, we might see a similar explosion in patents and intellectual property.”

India saw net foreign direct investment inflows of more than $30bn during 2016, according to data from UN Conference on Trade and Development. China meanwhile registered outflows, becoming the second largest investing country in the world.

“India isn't the most open of economies when it comes to foreign investment, but neither was China in 2000, and yet inward foreign direct investment increased from $40bn to $250bn a year by 2015,” said Smith

“Similarly, China went from making no investment abroad to making nearly $200bn a year – if India does the same that could mean significant M&A to spur Western markets.

“Effective domestic and foreign investment could enable India’s productivity to break out, as China’s did in the early 2000s.”

However, Smith said India’s propensity to invest abroad will likely depend on national savings, which are likely to be earned through trade.

“At less than 2 per cent, India’s share of global manufacturing exports is astonishingly small, but with much higher relative wages than China had in 2000, it’s unlikely to follow China’s path,” he said.

“Services exports are another matter, however. Services are less susceptible to Western threats of protectionism and there is no dominant emerging market player in the sector – China has not grown its share at all this millennium.


“India’s reserves and annual gross domestic savings are of a similar size to China’s in 2000, which went on to increase by almost $3trn and $5trn respectively.”

Lastly, household consumption will likely play a role if India is to overhaul China as the fastest-growing emerging market economy.

He said: “India’s level of household consumption is higher today than China’s was 17 years ago, but it could still increase by trillions over the next ten years – remember those more favourable demographics.

“Internet trends are notably nascent with just over one broadband subscription per 100 people – in 2015 China had almost 20 subscriptions per 100 people.

“With banking and monetary reform, there is plenty of scope for financial deepening, but household leverage (relative to income or assets) at 27 per cent is nowhere near as low as China’s in 2000, which was only 11 per cent.”

As such, Mona Shah, head of collectives research at Rathbones, said the firm prefers funds that invest in Indian-listed equities rather than overseas stocks with revenue exposure to India.

She said: “As India tends to trade at a valuation premium to emerging markets at large, we prefer managers who incorporate a high level of valuation scrutiny in their investment processes to ensure they are not paying too much if earnings are not going to come through.

“We have also long-since backed the consumer theme in India, and therefore favour managers who help us to express this theme.”

Shah added: “As India is a difficult market to get to know well and one that can suffer swings in liquidity, we seek managers that we think have a genuine edge when it comes to local knowledge such Jupiter India run by Avinash Vazirani and the JP Morgan Indian Investment Trust, managed by Rajendra Nair and Rukhshard Shroff.”

Performance of funds vs MSCI India over 5yrs

Source: FE Analytics

The £1bn five FE Crown-rated Jupiter India fund aims for long-term capital growth by investing in companies based or operating in the Indian sub-continent, under the management of FE Alpha Manager Vazirani. It has an ongoing charges figure (OCF) of 1.09 per cent.

The £786.5m JP Morgan Indian Investment Trust is manged by Shroff and Nair and aims to outperform the MSCI India index, via a diversified portfolio of listed Indian companies and those earning a material part of their revenues there.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.