The past year has provided a salutary reminder of the cost of backing the wrong emerging market and how easy it is to do. At the beginning of 2023, much of the excitement about the year ahead was founded on the post-Covid reopening of China’s economy.
In the event, Chinese consumers moved more cautiously than expected. What’s more, investors hadn’t accounted for the fresh challenges that China’s economy would face over the next 12 months.
Of these a debt crisis and collapse in confidence in the property sector were probably the biggest drags. These events ensured consumer confidence was more subdued than anticipated. Uncertainty following regulatory changes affecting the technology sector and protectionist moves in the west also weighed on sentiment.
In India, the story couldn’t have been more different. The stock market surged to a succession of new record highs last year and has added further to those gains so far in 2024. The participation of domestic individuals was strong last year, despite repeated warnings from the regulator about overexuberance.
India’s impressive growth outlook has been the key. Positive developments have included moves to upgrade India’s manufacturing capacity and expertise at a time when there is a global desire to diversify supply chains away from China.
China and India by the numbers
China and India persistently draw comparisons owing to their large economies and populations. Even so, their directions of travel are now at odds with one another. Forecasts suggest there is a risk these countries will continue to follow contradictory paths.
Demographics
According to the World Bank, India has already overtaken China as the world’s most populous nation.
| Population | Population growth rate | Life expectancy | |
| China | 1.41 billion | 0.0% | 78 |
| India | 1.42 billion | 0.7% | 67 |
Source: The World Bank 2022
India also benefits from a relatively young population and still competitive labour costs.
Growth potential
India clearly has a greater capacity for growth, given it remains less developed than China in a number of key areas and its economy remains much smaller. It currently has the world’s fastest growing large economy.
There are, however, significant growth constraints. Inadequate infrastructure is a critical drag. Another is the existence of a nearby global supply chain behemoth – something that China was never forced to contend with during its steep economic ascent.
India is currently upgrading its roads, ports, airports and railways but the task ahead remains substantial. India’s government has promised to address this issue with a further boost in funding if it prevails at this month’s general election.
| Size of the economy ($USD) | Economic output per head of population ($USD) | Internet users % of population | |
| China | $18 trillion | $12,720 | 76 |
| India | $3.4 trillion | $2,410 | 46 |
Source: The World Bank 2022
Economic growth
Since China began to open its economy in 1978, growth has averaged more than 9%1. Growth has slowed significantly since the pandemic though and the government has progressively reduced its official growth target.
IMF growth projections (%)
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | |
| China | 2.2 | 8.4 | 3.0 | 5.2 | 4.6 | 4.1 |
| India | -5.8 | 9.0 | 7.0 | 7.2 | 6.5 | 6.5 |
Source: IMF, January 2024
Over recent years, there’s been a significant shift in emphasis away from traditional sources of growth – investments and exports. Today, private domestic consumption, the development of high value services and a move towards low carbon energy are preferred. These trends are improving the quality of China’s growth at the expense of absolute achieved growth.
Stock market sizes
Despite a large disparity in economic size ($18tr versus $3.4tr) the stock markets of China and India are surprisingly close in terms of their representations in the MSCI Emerging Markets Index.
| % of MSCI Emerging Markets Index | |
| China | 25 |
| India | 18 |
Source: MSCI 29.03.24
This reflects a sharp increase in the value of India’s stock market since 2020, a period during which China’s has fallen. China’s position deteriorated last year amid weak economic data, a property debt crisis, tighter regulations for technology companies and the advent of a protectionist stance in the west. Investors reduced their exposures to China as a result.
Stock market valuations
Current valuations suggest markets are discounting continued strong growth in India and further weakness in China. The valuation applied to India isn’t all that much different from the world as a whole which, as we know, is now dominated by the US stock market and an optimistic take on the future monetisation of artificial intelligence (AI).
| Price/Earnings based on 2025 earnings | Price-to-book value | |
| MSCI China Index | 9.05 | 1.22 |
| MSCI India Index | 22.10 | 4.05 |
| MSCI World Index | 21.97 | 3.36 |
Source: MSCI, 31.03.24
India’s projected premium growth rate comes at quite a high price, while China languishes in depressed territory. Investing in China is clearly underpinned by value, as highlighted by a low price-to-book value. Investors are paying just 1.2 times the asset values of company balance sheets to buy Chinese shares.
So, China or India?
Ultimately it comes down to a trade-off between expected growth and current valuations. China looks cheap around current levels, while India may be verging on expensive. Even so, investors probably won’t mind too much paying up for India’s growth provided it keeps going.
Forecasts suggest Indian growth is set to remain world-beating over the medium term. That implies even stronger earnings growth among the companies best placed to capitalise on India’s success.
Meanwhile, China has begun to attract contrarian buyers on the basis that the bad news is in the price. Shares appear to have broken out of the yearlong downtrend of 2023 following a trend reversal at the beginning of February. These are the first signs we’ve seen of the possible ending of the buy India/sell China trade.
Given that China’s government appears to have thrown its hat into the ring in an effort to support the economy and stock market, hopes run high a new uptrend is forming. Signals from the economy have been broadly positive, including improving manufacturing surveys and inflation turning positive in February after six months in negative territory.
For all its present difficulties as well as far less favourable population demographics, China’s middle class will probably expand further over the next few years driving current and new markets with it. China’s evolving aspirational brands and the dominant market positions it has built up in electronic vehicles (EVs) and renewable energy hint at the great potential still to be tapped.
Investment strategy
Combining the two markets might make sense. Investing in momentum and value together can help to smooth returns. However, the relationship between these markets may well not stay the same as time progresses.
Given its stellar recent run, India looks more vulnerable to any correction in world markets. Equally, China may face further roadblocks from a second Trump administration in the US. The unwinding of excesses in China’s overblown property sector could well take some considerable time.
For all this though, both markets look set to provide investors with attractive opportunities in a world of slow growth and high interest rates. Given the large and growing sizes of these markets in a global context, this issue remains too big for investors to ignore.
Learn more about how you can invest in India and China
Sources:
1 World Bank, April 2024
2 Lazard Asset Management, 31.03.24
3 Comgest, 31.03.24
