Market Views: Will India overtake China in investment opportunities?

India is projected to surpass, or may have already surpassed, China as the world's most populous country this year. Will this translate into more opportunities for investment?
Market Views: Will India overtake China in investment opportunities?

India is expected to surpass China as the world's most populous country this year, according to projections by the United Nations (UN).

India's population is estimated to grow to 1.429 billion this year, overtaking China for the first time since the UN began recording population rankings in 1950. By the year 2100, India’s population is expected to be 1.5 billion, while China’s is projected to be 800 million.

India is growing into a favoured destination for foreign institutional investors looking to capitalise on the country’s need for infrastructure and renewable energies.

India is also seen as one of the beneficiaries of supply-chain diversification as companies seek to reduce their reliance on China as the sole manufacturing base.

Apple is one of the latest and most prominent companies to shift some of its iPhone assembly to India – away from Chinese factories run by its Taiwanese assemblers.

While a larger population doesn’t automatically translate into a stronger economy or a better-performing stock market, AsianInvestor asked asset managers and analysts if the population growth of India could mean the country might overtake China in investment opportunities as well.

The following responses have been edited for clarity and brevity.

Ray Sharma-Ong, investment director of multi-asset solutions

Ray Sharma-Ong

As India's population increases beyond China's, it will have a larger proportion of young population, an increase in financial literacy and an improvement in savings through financial investments.

Over time, we expect domestic flows into SIPs (systematic investment plans) to increase, which will be supportive for market stability. A lower rate environment from a loanable funds perspective due to high savings may result.

Lower funding costs help’s India’s fiscal balance and will be supportive for the currency.

India's younger population will also be a driver of increased demand for ESG investing. This is supported in parallel by India's commitment to reduce carbon intensity and accomplish net-zero emissions by 2070.

The issuance of green bonds for financing green projects is a start, and this segment is expected to grow significantly as the Indian government channels resources towards green initiatives for its current and future population.

We do not view India and China as competing investment opportunities, but rather complementary ones. India has higher economic and earnings growth prospects, but its valuations are structurally higher than most of Asia.

On the other hand, China is undergoing a period of economic growth moderation, but offers a higher exposure to growth assets at more attractive valuations.

From an asset allocation perspective, India's investment opportunities can act as a diversifier for China, with the two countries benefiting from each other's risk off events.

Arjun Divecha, founder of GMO emerging markets equity

Arjun Divecha

First of all, the return available to investors is not determined by population (unless it’s a really tiny country). If you look back from January 1993 to the present day, the MSCI India Index is up 1,020% while the MSCI China Index is only up 30%. Thus, population of a country is irrelevant in our view - what matters is whether companies deliver earnings and dividends to investors.

And on that score, India has massively dominated China over the past 30 years.

However, looking at population dynamics, demographics does matter and there are multiple factors such as the dependency ratio (proportion of working people to non-working people), labor force growth and female participation in the workforce.

What one can see is that China has an aging population and a labor force that is now shrinking, and that will make it harder for it to grow at rates that it was able to in the past 30 years.

On the other hand, India has a very small percent of the female population in the workforce and this will limit its ability to grow fast even though it has a young population.

Bottom line, demographic trends favor India, but from an investment return point of view, other factors such as macroeconomics and valuation are far more important to future returns than population dynamics.

Trinh Nguyen, senior economist, emerging Asia
Natixis CIB

Trinh Nguyen

Investors have sobered to several evolving factors in China’s investment landscape, including worsening geopolitical tensions between China and the US, subdued demand despite the services rebound, and an increasingly difficult market to navigate even with depressed valuations.

Meanwhile Indian data remains rather robust, which will likely lead to GDP outperformance versus China in 2023, even with a deceleration from 2022.

Beyond the cyclical disappointment, investors are also contending with longer term challenges for China such as elevated debt levels, worsening demographics and geopolitics.

Against such a backdrop, India stands out with a young and expanding population, relatively low debt levels, especially among households and corporates, and improving geopolitical leverage with the West and rest of the world.

From diversification of supply chains to investing in India’s growth sectors, the push to deploy capital into India will continue to increase as it offers attractive return to capital, despite hurdles such as red tape and poor infrastructure.

Indian policy makers have taken note and are pulling in foreign investments by prioritising investment in infrastructure, reducing red tape through labor market reforms, decreasing import duties for high-tech manufacturing and liberalising trade access.

These measures will entice investors, who are already pushed by a strong need to diversify from high concentration risks in China.

Sukumar Rajah, director of portfolio management, emerging markets equity
Franklin Templeton

Sukumar Rajah

India offers investors a significant growth opportunity given its structural tailwinds, which include attractive demographics, a market-oriented economy, and a rising middle class.

This opportunity was previously constrained by bottlenecks in infrastructure, bureaucracy, and a weak fiscal position.

A resilient Indian rupee in combination with increasing domestic demand and supply chain diversification has contributed to increasing manufacturing output and rising foreign direct investment.

The services sector is broadening beyond IT consultancy into areas including financial and legal services. From a risk perspective, India’s macro-economy is more robust, inflation has structurally declined, and geopolitics is less fraught due to India’s non-aligned stance.

Chinese economic growth is slowing due to a higher base (it is second largest global economy, over five time the size of India), demographic headwinds and geopolitical tensions.

But even with a lower rate growth, China can continue to grow faster than most developed markets and make an outsized contribution to global growth.

Despite top-down concerns, we continue to find bottom-up stock-picking opportunities in China.

The expansion of Indian investment opportunities only serves to improve the breadth and depth of the emerging market investment universe.

Despite headwinds, China remains a key driver of global growth and an important source of investment opportunities within which we continue to find bottom-up stock picking opportunities.

Anand Gupta, portfolio manager
Eastspring Investments
Anand Gupta

In our opinion, global investors need not choose between the China and India equity markets, as both offer opportunities in different sectors and can have complementary roles in portfolios.

These markets differ in policy direction: China is focusing on domestic consumption and increasing self-sufficiency in key sectors, while India enjoys strong foreign direct investment inflows as it presents itself as an alternative location for companies looking to diversify their supply chains.

India has recovered strongly from the COVID pandemic, and the IMF has forecast that India will contribute 15% of 2023’s global economic expansion and drive one fifth of global growth this decade.

India is also expected to provide more than a sixth of the increase of the world’s working-age population between now and 2050 - a boost for significant demographic dividend if sufficient jobs can be created.

As global investor risk sentiment improves towards emerging markets (EM), both India and China will benefit from foreign investor inflows; while EM funds have recently increased exposure to India, average weight remains at multi-year lows, suggesting significant room for exposure to rise

Anh Lu, lead portfolio manager, equity strategy, Asia ex-Japan
T.Rowe Price

Anh Lu

India has outpaced China in recent years from an economic growth perspective, and this trend is expected to continue given the favorable demographics.

From an investment standpoint, both markets offer bottom-up opportunities, but the key areas of opportunities differ.

India offers more industries with significant growth potential due to under-penetration, including financials, consumption, infrastructure, CAPEX, and technology.

In contrast, many of these sectors in China are already highly penetrated, therefore, opportunities lie in upgrading, industry consolidation, and better capital management.

Nonetheless, there are still some areas with secular growth potential in China, particularly in businesses aligned with the government's goals of improving environmental protection and societal equality.

While India could benefit from supply chain and money flow shifts, valuations are currently high.

China may experience a short-term growth bounce due to the normalisation of Covid-19 and abating policy headwinds, but economic growth in China is expected to slow down in the medium term.

However, we need to remain disciplined about valuations, the Chinese market has already reflected many negative factors, which creates more opportunities in China compared to India at this stage.

Both markets present bottom-up opportunities, we expect Indian weighting to continue rising over time as it remains underrepresented in regional and global indices.

Michele Barlow, head of investment strategy and research, Asia Pacific
State Street Global Advisors

Michele Barlow

China’s population is aging and its economy is maturing, which will inevitably lead to slower growth.

India on the other hand has a younger population and has yet to see the same kind of urbanisation as China, which should support higher economic growth. 

Despite these differences, we continue to see investment opportunities in both markets.

In China, aging population is increasing demand for better healthcare, and government’s call for biotech innovations present significant opportunities.

We are also seeing a localisation in supply chains driven by foreign companies’ desire to diversify across other markets, and as domestic companies climb the value chain from improving competency.

Growth of the middle class should also support domestic consumption, while green and sustainable development provide additional areas for investment.

In India, favorable demographics and a comparatively low level of consumption are expected to be positive for the consumer segment. 

India’s strong push on digital payments is empowering consumers providing support to the consumer discretionary sector. 

We also see private sector financials benefiting from their drive into retail, tapping into favorable growth dynamics. 

Urbanisation is expected to drive Infrastructure development providing opportunities, although it’s important to be selective as financing capabilities can create cyclicality.

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