Its relaxing of strict COVID-19 rules, and reopening of its economy, was welcomed by many, particularly in Australia where a number of companies were well-positioned to benefit from the market revival.
However, after this promising start, the anticipated China economic recovery has stalled, with economic data releases falling short of expectations. For example, consumer confidence has flatlined well below its highs. In addition, there has been little relief from the property measures imposed back in 2020 which has made for a soft market.
In contrast, India is currently having its moment in the sun. Indian Prime Minister Narendra Modi recently completed a state visit to the US, as well as receiving a rockstar welcome on his trip to Australia when he met with Anthony Albanese. At the same time, the Indian equity market is performing strongly.
There is no doubt that India finds itself in an enviable position. From a political perspective, it has been courted aggressively by the US, partly as a counterbalance to China’s influence in the Asian region. Likewise, it is in an economically strong situation, with inflation and interest rates likely to have peaked, its balance of payments in check, and foreign direct investment still climbing.
There are also strong tailwinds supporting its investment fundamentals, such as a stable political environment and a growing and relatively young population, as well as potential capex expansion underpinned by the promise of supply chains moving out of China.
So at face value, India looks like an attractive proposition for investors, while China less so.
But is this really the case? In our view, investors also need to consider the price being paid for investments, and this is where things start to look a bit different.
Pay too much for an asset, and it doesn’t matter how good the fundamentals are, investors can still lose money. Successfully weighing up those fundamentals with the prevailing valuations is at the crux of effective investing.
For example, Indian Consumer Staples valuations have expanded by over 40 per cent in the past decade, and this sector now trades on over 45 times forward earnings.
At the same time, Earnings Per Share growth has compounded at around 8 per cent. So despite the positive fundamentals, there is greater risk than is appreciated by investors in the Indian equity market.
Compare this to China. As mentioned earlier, much of the enthusiasm for China has waned over the course of 2023, as the economic recovery stalled. Its market is currently trading on around 10 times forward earnings, compared to 21.3 times in India. This suggests that much of the pessimism about China’s situation is already priced in.
With sentiment weak, the market is pricing in a high degree of bad news for China, but giving little consideration to what could go right. In contrast, India is attracting bullish sentiment but with little thought to the downside.
This doesn’t mean that there aren’t pockets of opportunity in India. For example, financials continue to look attractive. Many of the issues that impacted the banking sector in the 2010s have now been resolved and if the current positive economic cycle continues, banks will be one of the key beneficiaries. We don’t believe this has been fully priced into the current share prices, creating the opportunity for good upside.
But investors should remain aware, if the promised growth or reform does not live up to expectations, there is downside risk to Indian equities. Meanwhile, as contrarian investors on a risk-reward basis, we think the China opportunity looks enticing. We expect the second half of 2023 will see more progress on China’s thus-far elusive recovery.
Will Main, portfolio manager, Asia and emerging markets, at Maple-Brown Abbott.
