As China’s growth falters, Alistair Thompson argues that India’s economic momentum offers investors exceptional opportunities.
Aided by the recent upswing in India’s economic growth rate, Asian markets could again become a hunting ground for both growth and income investors. As part of an initiative to attract foreign investment, Indian Prime Minister Narendra Modi and his government introduced a ‘Make in India’ campaign in 2014. As a result, policies are now in place to reduce bureaucracy and implement structural reforms. However, the cornerstone of the campaign is the establishment of the right infrastructure.
“There is a long list of infrastructure projects that we’re optimistic will go through over time,” says Alistair Thompson of First State Stewart Asia. India has the world’s second-largest population after China, yet is frequently outshone by its Chinese counterpart. However, slowing growth and a debt-to-GDP ratio of 250% has made investors increasingly nervous about the People’s Republic.
For the more risk-aware investor, exploiting opportunities in Asia is part and parcel of creating a geographically diversified investment strategy. However, given the lack of free market-orientated reforms, it remains more difficult to apply the normal investment principles in China’s equity market.
Another obstacle is the cooling off of high levels of growth seen in recent years, combined with the increasing levels of debt in the market. These are normally early warning signs that an economy is losing momentum and, consequently, that stock performance is likely to be less predictable.
“There are some [Chinese] sectors that are simply uninvestable; for example the banking sector,” says Alistair Thompson. “The government dictates how much is lent and to whom, and that’s not a model that we’re very comfortable with. That said, there are a number of really good Chinese companies. Unfortunately, a lot of them, at the moment, are very expensive. There’s oversupply of everything.”
One way to optimise opportunities in China, without taking on too much country risk, is to invest in companies that are exposed to its economy. One such company is Lion Corp., an oral care provider, listed on the Japanese stock exchange. “They’ve made significant inroads over the last couple of years in other parts of Asia and specifically China,” says Jim Hamel of Artisan Partners.
For more risk-averse investors, it might be preferable to consider alternative options presented in Asia. Thompson’s positive outlook on India is fuelled by the revival of the country’s infrastructure network, which should initially generate employment within the engineering, construction and railroad sectors. In turn, this will make employment opportunities more easily accessible to those living outside the major cities, through better rail links.
“Our optimism is supported by talking to companies,” say Alistair Thompson. “Markedly, IT services in the region are performing well; for example, the third-largest Indian IT services company, Infosys, is currently producing a strong dividend yield whilst trading on low double-digit multiples. This is alongside a growth rate of 15% that could be accredited to its exceptional level of innovation.”
Thompson says that other sectors performing well include healthcare and banking. A prime example is Dr. Reddy’s, a pharmaceutical company recognised for its strong management team. HDFC Bank and Kotak Mahindra Bank, two private banks, are also performing well, as they take banking market share from public sector companies.
In anticipation of the infrastructure overhaul, Thompson argues investors could see India’s economy grow at an annual rate of 5–8%, rather than the average 3–4% seen during the terms of other recent governments.
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The opinions expressed are those of Alistair Thompson of First State Stewart Asia and Jim Hamel of Artisan Partners and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.