How to Invest in Growth Leader China and Promising Distant Rival India
CPPIB and CalSTRS are among the many institutions that have put money into the expanding Asian economic powers.
Art by Vikki Zhang
One Asian nation is considered the world’s next top economy, poised to burst past the United States. The other shows a lot of promise. Both China and India have enormous populations, thus desirable consumer populations. But there are still plenty of unanswered questions, perhaps most importantly: How should institutions invest in them and why?
China, whose stock market has now slowed, has the most robust prospects because it has more to work with, namely a much larger economy. India, although further back, might just grow faster as it scrambles to catch up. It’s happened before. That’s a broad synopsis of strategists’ takes.
India, wrote UBS analysts in a recent research report, “is the only country with the scale to match China, but it will not be the next China.” Reason: China’s economy is five times larger, and India has a long way to go to even come close to matching it. Still, the paper went on, for patient investors and, in particular, institutional ones, “bounties await those who embark on the journey” of investing in India.
Let’s examine how the two giant nations and their gigantic populations (India has 1.3 billion people, China 1.4 billion) are faring now and may in the future. And then look at how two large North American pension funds, the California State Teachers’ Retirement System (CalSTRS) and the Canada Pension Plan Investment Board (CPPIB), are investing in each.
In terms of how investors weigh emerging markets, right now there’s little contest. China is the highest weighted nation in the MSCI Emerging Markets Index, with a 39.5% share. India is fourth biggest on the list, at 9.2%, behind No. 2 Taiwan and No. 3 South Korea.
That tracks the differences in economic size. China, with the earth’s second biggest economy, has a gross domestic product (GDP) of $13.4 trillion, far ahead of India’s $2.7 trillion. India has the seventh largest economy, and the third largest in Asia (behind Japan). For a long time, India was growing faster than China. One crucial difference is its demographics: India has a growing youthful cohort while China doesn’t, and in fact China is aging rapidly.
Stock markets, though, show a more complex picture, and the MSCI iShares exchange-traded funds (ETFs) for each show how. For a long while, Chinese shares were ahead. Over five years through last week, China stocks were up 15.6% annually, versus 10.2% for India. But this year, India leads, 4.3% to 0.7%. What’s more, India’s Sensex index is much more highly valued, if not overvalued, with a price/earnings (P/E) ratio of 34.8, CEIC Data indicates. China’s Shanghai Composite’s P/E is a lot less than half that, 16.1.
China Stocks: Better Over Long-Term, But India Catches Up
Returns in iShares MSCI ETF
Source: Morningstar
* Annualized Returns
Why? With lagging economic growth and deeper virus problems than China’s, you would think India would have less buoyant stocks. The difference is government policies and the ways a mending global economy stands to affect each, experts say.
For India, said economist Raghuram Rajan, a former governor of India’s central bank and now a professor at the University of Chicago’s Booth School of Business, the prospect of a recovering world economy has investors excited about a coming surge in the nation’s exports. “India will have a strong export performance,” he said in an interview on the subcontinent’s NDTV. He noted that investment inflows into Indian stocks have been strong.
Further, India’s government in New Delhi has a $35 billion fiscal stimulus campaign that’s underway, an extension of a rescue plan it announced in May. The relief package is to be funded by borrowing and selling some government assets, not through tax hikes, which could siphon off people’s incomes and hinder their consumption.
“In terms of GDP growth and the kind of countries that we expect will exhibit the most V-shaped bounce back, India is right at the forefront,” said Jonathan Garner, chief Asia and emerging markets equity strategist at Morgan Stanley, on CNBC.
The picture is far different for China. The Beijing regime is leery about how government aid could fuel an asset bubble, which has occurred in the past—after the 2008 financial crisis and the 2015 slowdown. So it hasn’t hatched a stimulus plan.
To BCA Research, “decelerating growth in China” will mean “financial markets will move accordingly.” In addition, the Bank of China, the country’s central bank, has drained liquidity from the financial system since January. Margin finance, the key component of the last bubble, is one-third lower than its 2015 peak.
That’s what’s taking place now. What about the future?
Long Term: Autocratic vs. Democratic Models
The big macroeconomic question is whether China’s command economy, where government-owned companies exist alongside privately owned ones that dare not question Beijing’s authority, will surmount the democratic model and remain ahead into the future. Most analysts concentrate on the US-China rivalry. The India-China competition is the same thing, albeit on a smaller scale.
Indian Prime Minister Narendra Modi has made a point of reaching out to foreigners to invest in his country. The Modi government has worked to improve its red-tape problems and has bettered its position on the World Bank’s list on ease of doing business scale. Of the 190 nations surveyed, it rose from 130th place in 2016 to 63rd last year. But China ranked No. 31.
Maybe China’s higher doing-business efficiency score is the result of Beijing’s insistence of pairing outside investors with Chinese partners. Do that and approvals can go through swiftly. The downside, for non-Chinese companies wishing to get in on China’s bounty, is that the foreigners must hand over their intellectual property to the local partners. This arrangement has galled both the Trump and Biden administrations.
Another factor is that China is far ahead in infrastructure, with first-rate roads, bridges, tunnels, and buildings. By contrast, India’s is primitive. As an authoritarian regime, China can easily construct anything, without having to bother with permitting, lawsuits, or environmental impact statements. If Beijing wants to run a superhighway through a populated area, the inhabitants have no choice other than to move.
In economic growth terms, the two were close in 2019, with the edge to China at 6.1% and 2.3% in pandemic-battered 2020. India, which suffered more from COVID-19, clocked 4.2% for 2019 but last year shrank by almost 11%.
To Gabriela Santos, global market strategist at JPMorgan Asset Management, there’s little doubt that China will outpace all others and supplant the US as the biggest economy by 2027. “China is set to double its GDP per capita, and, if successful, it will cross into the threshold of being a wealthy, high-grossing society,” she said.
The per capita GDP figure for China was $10,216 as of 2019, far ahead of India ($2,099), by the estimation of the World Bank. Both have large populations in poverty. The US, by contrast, is at $65,297.
How 2 Big Pension Funds Invest in India and China
Myriad ways exist to invest in the two Asian giants. Direct investing is one. The University of Michigan committed a total of $29 million to two funds managed by Matrix Partners, a venture capital (VC) firm with a primary focus on early stage investing in the US, China, and India. Securities investing, of course, is easier and more liquid.
Like many Canadian public pension programs, CPPIB—with $377 billion in assets, it’s Canada’s largest—has long held positions in overseas stocks, especially in emerging markets. It has offices in Hong Kong and Mumbai.
As the fund’s then-CEO Mark Machin told Reuters in 2019, “We are more likely to be investing in assisted living and old-age care in China more than India, while in India looking at things like education.”
CPPIB intends to boost its investments in China to one-sixth of its portfolio from 13%. It has substantial public equity holdings in Ant Financial, China Gas Holdings, Postal Savings Bank of China, and Tencent Holdings, the internet colossus. The fund recently took a $100 million private placement in biotech firm Hutchison China MediTech, known as Chi-Med.
Similarly, CPPIB has a stake in India’s Kotak Mahindra Bank. In a report, CPPIB explained that its attraction to India rests on the nation’s “advantageous demographic profile, a growing middle class, and a healthy financial system.” Building out infrastructure, to buck up one of India’s biggest deficiencies, is a major CPPIB focus. The pension fund gloms onto local partners to tap that opportunity.
One such endeavor is an information technology park in Chennai with partner Shapoorji Pallonji Group. Then there’s an alliance with Piramal Enterprises Limited to provide structured debt financing to residential projects across India’s major urban centers. And an infrastructure investment with Larsen & Toubro, one of India’s largest engineering and construction companies.
Other approaches include corporate finance. The Canadian plan last year plugged $250 million into two credit funds run by Baring Private Equity Asia, which lends to mid-market Indian companies.
For CalSTRS, the US’s second largest public pension plan, with $287 billion in assets, China represents an opportunity. Yet the fund also is aware that investing there entails what plan Deputy CIO Scott Chan called “geopolitical risks” and problems with financial reporting transparency. It has embarked on a major project to study how it approaches investments in China.
China makes up 3% on the CalSTRS portfolio, its single largest exposure of any country outside the US. Yet Chris Ailman, the CalSTRS CIO, has termed investing there “a conundrum.” He pointed to environmental, social, and governance (ESG) concerns and fears that outside investors are indirectly funding China’s military.
CalPERS’ equity holdings include one of the other Chinese tech megaliths, Alibaba, as well as scores of lesser-known names such as Shanghai Construction, China Merchants Bank, and China Telecom. In India, it owns stock of numerous companies such as Tata Chemicals and Century Textiles.
Given their expected growth, India and China represent sometimes problematic but also enticing opportunities for institutional investors, and that only stands to deepen over time.
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