Morningstar
RecommendedMorningstar AwardsWhats New IconETFs Whats New IconIncome Week Whats New IconThematic Investing Whats New IconSign Up to Our Newsletters Open Window Icon
Special Report

Is India the Anti-China?

Having made the quantum leap to becoming an urban service economy, India is retracing its steps to best China in manufacturing 

James Gard 20 July, 2022 | 8:36AM
Facebook Twitter LinkedIn
Font-Size

Taj Mahal

As China has struggled in the last eighteen months, Indian equities have been on a winning run. But more recently they've come back to Earth.

The two emerging superpowers are often pitted against each other in the battle for investor capital, although both are likely to be dominant economies in the next decade and beyond.

In reality, EM investors in funds that mimic the benchmark are likely to have a bit of both, with a heavier weighting towards China. Still, specialist China and India funds are popular with investors keen to direct more direct exposure.

We’ve recently featured some potential reasons for buying back into China, from its undervalued tech stocks to its role as a hedge against a US recession. Now let’s turn to the arguments in favour of India in its great rivalry with China, from the lens of an India investing expert.

India Has Outperformed

2021 was a standout year for Morningstar India with a total return of 30%. Over 10 years the index has posted trailing annualised returns of 10%, over five years this has been 7.43%, and over three years, 10.71%.

While Morningstar China had a strong 2020 as it was first out of the blocks during the pandemic (rising 31% before losing 21.1% in 2021) over 10 years the index has posted annualised returns of 5.67%, 1.58% over five years and -1.15% over three years.

While India has outperformed over these periods, a look at the individual year’s performance is not clear cut: investors wanting a "when China underperforms, India outperforms" headline may be disappointed. India had great years in 2012, 2014, 2018 and 2020, while China did well in 2012, 2017, 2019 and 2020.

Professional EM managers often reallocate capital to better performing countries, but for private investors this is expensive and an attempt to time the markets. Who could have predicted that China, the source of the Covid outbreak in 2020, would be the best performing global stock market that year?

Government Influence is Weaker Than You Think

Compared with China and Russia, India is a country where the government has a relatively small stake in commerce, points out Ayush Abhijeet, associate director of investments at White Oak Capital, and adviser to the Ashoka India Equity Investment Trust.

In emerging markets, the battle between the state and the private sector is often not a level playing field, but Western companies like Vodafone have successfully sued the government and won.

"Key to the rule of law is property rights and the enforceability of property rights," he adds.

Security experts in the US and the UK have recently stepped up warnings about Chinese espionage, both government and corporate. China’s effective overnight nationalisation of online education firms, following on from high-level intervention in the Ant Financial IPO, have alarmed some foreign investors.

China’s Manufacturing Edge May be Waning

Abhijeet says India essentially skipped one of the key stages of industrial development, moving forward in a quantum leap from agrarian to urban service economy. In that period, China became the factory of the world.

As a result, India is retracing its steps to build up its manufacturing capabilities, for example in generic pharmaceuticals. In parallel, Chinese labour costs have soared and Abhijeet estimates these as four times the price of labour in India. The south Asian country is "doing it better, faster, cheaper" than China, he says.

Coupled with India’s strong tradition of IP protection, this is a compelling argument for companies wanting to "rebuild" their supply chains by diversifying them, Abhijeet says.

India isn’t a One Sector Market

Many EM markets have strong sector bias, which can work in their favour (and vice versa) when global trends are supportive.

For instance, technology was one of the big winners during lockdown, and China’s Tencent and Alibaba rode the wave of that rebound. Recently, oil producing countries have put 2020 behind them and posted strong gains: the United Arab Emirates, Qatar, Kuwait, and Saudi Arabia are among the rare stock markets in positive territory this year.

Financial companies have a heavy weight in India’s benchmark because of HDFC, ICICI, Bajaj, but information technology, energy, consumer staples, healthcare are also well represented. As such, "India has a very heterogenous set of investable opportunities," Abhijeet says.

TAGS

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn
Font-Size

About Author

James Gard

James Gard  is senior editor for Morningstar.co.uk

 

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures

The Morningstar Star Rating for Stocks is assigned based on an analyst's estimate of a stocks fair value. It is projection/opinion and not a statement of fact. Morningstar assigns star ratings based on an analyst’s estimate of a stock's fair value. Four components drive the Star Rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market price. This process culminates in a single-point star rating that is updated daily. A 5-star represents a belief that the stock is a good value at its current price; a 1-star stock isn't. If our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Morningstar Star Rating for Stocks, please visit here

Quantitative Fair Value Estimate represents Morningstar’s estimate of the per share dollar amount that a company’s equity is worth today. The Quantitative Fair Value Estimate is based on a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies which includes a financial forecast of the company. The Quantitative Fair Value Estimate is calculated daily. It is a projection/opinion and not a statement of fact. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Quantiative Fair Value Estimate, please visit here

The Morningstar Medalist Rating is the summary expression of Morningstar’s forward-looking analysis of investment strategies as offered via specific vehicles using a rating scale of Gold, Silver, Bronze, Neutral, and Negative. The Medalist Ratings indicate which investments Morningstar believes are likely to outperform a relevant index or peer group average on a risk-adjusted basis over time. Investment products are evaluated on three key pillars (People, Parent, and Process) which, when coupled with a fee assessment, forms the basis for Morningstar’s conviction in those products’ investment merits and determines the Medalist Rating they’re assigned. Pillar ratings take the form of Low, Below Average, Average, Above Average, and High. Pillars may be evaluated via an analyst’s qualitative assessment (either directly to a vehicle the analyst covers or indirectly when the pillar ratings of a covered vehicle are mapped to a related uncovered vehicle) or using algorithmic techniques. Vehicles are sorted by their expected performance into rating groups defined by their Morningstar Category and their active or passive status. When analysts directly cover a vehicle, they assign the three pillar ratings based on their qualitative assessment, subject to the oversight of the Analyst Rating Committee, and monitor and reevaluate them at least every 14 months. When the vehicles are covered either indirectly by analysts or by algorithm, the ratings are assigned monthly. For more detailed information about these ratings, including their methodology, please go to here

The Morningstar Medalist Ratings are not statements of fact, nor are they credit or risk ratings. The Morningstar Medalist Rating (i) should not be used as the sole basis in evaluating an investment product, (ii) involves unknown risks and uncertainties which may cause expectations not to occur or to differ significantly from what was expected, (iii) are not guaranteed to be based on complete or accurate assumptions or models when determined algorithmically, (iv) involve the risk that the return target will not be met due to such things as unforeseen changes in changes in management, technology, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, tax rates, exchange rate changes, and/or changes in political and social conditions, and (v) should not be considered an offer or solicitation to buy or sell the investment product. A change in the fundamental factors underlying the Morningstar Medalist Rating can mean that the rating is subsequently no longer accurate.

For information on the historical Morningstar Medalist Rating for any managed investment Morningstar covers, please contact your local Morningstar office.

For more detailed information about conflicts of interest, including EU MAR disclosures, please see the “Morningstar Medalist Rating Analyst Conflict of Interest & Other Disclosures for EMEA”here

Select Your Site Edition To make sure the site is relevant to you, we need to know if you’re an individual investor or a financial professional.