Eastern Promises

Eastern Promises
A closer look at China and India

By Jonathan Passmore, Senior Vice President-Portfolio Manager, Int’l Equities GE Asset Management

China and India have captured the world’s imagination and an increasing share of global gross domestic product (GDP) in recent years as they rewrite the economic playbook. They are different but share powerful characteristics that make Asia the region to watch for in the next generation. Economic scale is the simplest way of illustrating their growing importance. Combined, Chindia’s GDP is less than 30% of the U.S. today, but estimates for 2020 suggest that figure will rise to 60%. At the same time, per capita GDP is rising rapidly, albeit at different rates. While India is forecast to be 20% of the U.S. per capita GDP by 2050, China is forecast to reach over 35% in the same period.

Contributions to global GDP growth have come, historically, from the developed markets. Recently, however, the BRIC markets have become increasingly significant. Brazil and Russia figure more modestly and India and China contribute the largest share of growth, even more than the U.S.

Naturally, the most dynamic segment of growth in the Chindia market is infrastructure, in particular, components of the economy that facilitate transportation, energy, communication and manufacturing. Current infrastructure spending in China and India is a multiple of the investment taking place elsewhere.

Diverging demography

Currently, China and India comprise some 38% of the world’s population but the demographics within the two countries are diverging. China has an aging population, the result of the one-child policy, while India is more youthful. By 2030, India’s population may bypass China’s, with somewhere between 1.4 and 1.5 billion people in each country. And we know that young populations drive growth.

Wealth is growing in these countries as their economies expand. While smaller than the U.S. in terms of real and purchasing power parity GDP, savings rates in both China and India are superior—higher, in fact, than in all developed markets including Japan. Rising wealth offers opportunities to investors, notably manufacturers of products satisfying the needs of the middle classes.

But other investment opportunities exist. A major factor in the rising price of oil has been demand coming out of Chindia, In the mid-1990s, combined demand represented perhaps 5% of the world total: that could reach more than15% by 2020. The political systems that back these two countries are fundamentally different, contributing to varying rates of growth over time. The more authoritarian Chinese approach combined with an approved level of capitalism has worked well over the last 20 years. India’s democratic Parliament, while more aligned with Western practices, illustrates a shortfall of true democracy: give everyone a voice and it takes a little longer to get things done.

Major differences exist in how living standards have improved over time. In most cases, China has outstripped India’s efforts: improving mortality rates in children, life expectancy, school enrollment, literacy and even poverty. China’s rapid growth has materially contributed to these differences in recent years. Wealth has come from trade imbalances but also from foreign direct investment. Investment inflows into China have dwarfed India’s in recent years. However, while investment has favored China’s development, consumption has consistently contributed more to GDP in India.

Finally, while China and India are recognized for the growth they bring to the global economy, that appreciation is yet to be reflected in the stock markets. More than 35% of world population only achieves 10 to 11% of global market cap. Even in the Emerging Markets indices they are radically underrepresented. With a combined market cap approaching $7 trillion they only account for approximately 22% of the MSCI EM Index on a free float adjusted basis. Investors therefore should consider taking a more proactive approach to investing in these markets of the future.

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