China was a place many investors flocked to following its impressive economic rise in the last twenty years.
There are more and more investors expresssing concerns about China. Whether it is geopolitical concerns, debt and developer issues, or govenrment overreach, investors have shunned China for 3 years now.
At Investwisley we have decided the geopolitical risk is too high, and we will not directly invest in China. Even thought Chinese equities look comparatively cheap, the risks are too high.
We do indirectly have some small allocation through global companies - Apple for example, but the investments are made in the understanding that China is not going to drive the success of our efforts.
We have therefore looked for alternatives to allocate our clients capital. Japan has taken some allocation, but that investment now looks fully priced and emerging markets is always a risk when the credit default cycle is unknown.
Our attention has therefore turned to the opportunity that is India. We have made some small allocations, but view India as a great place to invest over the longer term. I recently received a research paper from our research partner - Banyan Tree Investment Group. I have shared that below, it conconcisely highlights the opportunity and risk that India offers. Of course if you want to understand how to access this opportunity we are available to discuss the options with you. Investing direclty into India is an obvious way to benefit from India's growth, but it is not the only way to invest.
Banyan Tree Analysis and Commentary:
# Indian equities - long-term opportunity and near-term risks. We have been positive on Indian equities for many years now and price performance across Indian equities (large, mid, and small caps) has been stellar over the past 3 years both in relative terms and absolute terms.
Source: Bloomberg, Banyantree
However, investors need to be aware of both risks and opportunities.
India opportunity - watch the consumer. In the chart below we have provided the GDP per capita for India, China, and Australia. GDP per capita is a good measure of economic performance and is also a good indicator of average living standards and economic well-being. Firstly, it should be noted the staggering increase in China’s GDP per capita over the past 15+ years – no surprise why consumer brands from high end luxury to everyday items have targeted the Chinese consumer market (not just in China but Chinese tourists in developed markets!). According to historical trends, the US$2,000 GDP per capita level has typically been an inflection point for any economy. In the chart below, China reached this point in 2006 and India has just hit this point. We believe discretionary spending could be a major beneficiary in India going forward. Further, anecdotal and our discussions with investors on the ground suggest there is real momentum in the Indian middle class – there is motivation to spend (perhaps some Covid restrictions hangover) and upgrade to higher end products and services. India is also enjoying significant success on the global level, with companies looking to the Indian market as a diversification away from China (consumption and production).
India risks - upcoming national elections in April 2024. We do believe this risk is being under appreciated by the market and represents some near-term risk for Indian equities. Leading up to the main show in April 2024, there are regional elections which could provide some indications of how Prime Minister Narendra Modi’s BJP (Bharatiya Janata Party) is tracking. From our discussions with people with knowledge in India, the BJP party could potentially lose some of these elections, but it shouldn’t be viewed as a precursor to the national election in April 2024. PM Modi has a very strong standing, has delivered strong reforms (like attracting global supply chains) and we believe his re-election would go a long way in maintaining the momentum in India’s economic growth. The alternative in the April 2024 election is the Indian National Developmental Inclusive Alliance (INDIA), which is a political alliance of 28 parties in India led by the Indian National Congress. Mathematically they can win. We would view a BJP loss as negative given an alliance of 28 parties in power (with ranging vested interests) is likely to lead to some policy deadlock. We can use the experience of 2004 to see how the market may react toa potential BJP defeat in 2024. In May 2004, after the BJP-led government was dealt a surprise defeat at the national election, the Indian market fell close to 20% in one month. Given the strength in Indian equities (relative and absolute) over the past few years and elevated valuations, we cannot fully discount history potentially repeating itself. All else being equal, we would see this as buying opportunity.
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