We are nearing the end of 2022 and China and India are trading at opposite valuation levels — China is trading at 5-year lows whereas India has staged a spectacular recovery from June lows to be one of the best performing markets YTD.
There is a saying about India — the optimists and pessimists are always disappointed. Based on over 30 meetings [Note from the editor: Alice Wang is currently in India] so far, our current impression is that the domestic Indian economy is overheated, and while margin compression expectations may have been factored in, volume forecasts still have to come down. IT Services, the country’s largest export and 16% of NIFTY is just beginning to show initial signs of cracking, as it is highly correlated to global GDP growth. However, overall, the domestic economy is relatively insulated from global slowdown in comparison to say, Taiwan, Korea, and Vietnam, as its exports to GDP ratio is just 20%. Weakness in oil prices as a result of an anaemic global economy would be a tailwind for domestic consumption.
China’s problems stem from its regime. While many companies are managing growth despite the extraordinarily challenging conditions, valuations are severely depressed due to the relentless Zero-COVID policies, the regulatory environment, as well as political risk with Xi Jinping’s first post COVID trip involving a meeting with Putin. Domestic consumption remains very weak and the export sector, which has held up the economy during COVID, is now showing signs of deterioration. But China is also a domestically oriented economy, with a similar exports to GDP ratio of roughly 20%, and if policies can be relaxed, the domestic economy could easily make up for slowing exports. With both Xi and Li Zhanshu making their first post-pandemic overseas trips this week, there are some positive signals with regard to potential easing following the 16 October Congress.
How do we invest in these two economies at this juncture?
India: focus on industrial stocks and consumer platforms
For India, we will focus on industrial plays, where valuations are much more reasonable and where we think there is an underweight as most global fund managers are overweight consumer names. Our trip this time gives us a new impression of the capex and infrastructure build out of the country (the longstanding problem with India’s development) due to two significant developments. On the public side, the successful implantation of the GST taxation system since the demonetisation of 2018 enables the can-do attitude of government officials that we have met. An example of execution that we have seen is the major roadwork system being developed throughout the country, and even in Mumbai the new elevated highway along the coast will bring significant efficiency benefits to the congested city. On the private side, the economic power of the dynastic business families allows private capital to fulfil the role that centralised governments like China and Singapore have played. We have already seen this happen with Reliance Jio. Since entering the telco market in 2016, Reliance Jio has invested over USD 25bn in its telephony capex and USD 1.9bn in digital technologies, building some of the best value products in the industry and further consolidating the industry from 8 players to 3. Already, they are bidding for 56% of the total 5G spectrum auction. This reminds us of the industrialisation period of America, where leading families like the Carnegies fronted the work of building out the country’s most pressing infrastructure needs.
As a result of these significant changes, we will prioritise industrial companies with high entry barriers, including construction machinery companies like ACE, a leading crane company in India, and KEI Industries, a wiring company. These sorts of leading industrial companies also benefit from consolidation trends in fragmented markets. Secondly, we will focus on consumer platforms — our experience of the last 10-15 years of Chinese development have led us to understand the fickleness of the emerging and digitalised customer. Unlike the earlier development of China and the West, even rural India is now highly digitalised, partly thanks to companies like Jio and Airtel, meaning consumer preferences can change faster and upgrade faster than brands, particularly large brands, can move. We will focus on consumer platforms, which include everything from white goods financing platforms like Bajaj Finance to leading experiential mall operators like Phoenix Mills or the online platforms such as Nykaa. Finally, we will align ourselves with formalisation of a deeply fragmented economy — for whilst in developed countries technology provides disruptive market taking growth, in India leading players taking market share will go from 10% of the market to 30% of the market in the next 5-10 years.
We temper the long-term potential with short-term risks, as currently India is at the peak of its reopening and estimates still need to come down (the economy cannot keep growing at 13%). China, by contrast, is at the very opposite end of the business cycle versus all other countries. Chinese valuations are deeply discounted, and the quality and technological advantage of the companies is still much higher than that of Indian companies, and the market size and per capita GDP are still much higher. We need to wait and see until after the Party Congress for greater visibility on the recovery of the Chinese economy, but from an investment, business cycle and valuation perspective, Chinese companies are still the better long-term opportunity at the moment. We upgrade India’s long-term outlook and believe that the experience we have gained from the lifecycle of Chinese company development over the last 10-15 years will give us a unique angle on the future of this country.
China: a world leader who should wake up after the Communist Party Congress
In China, we believe that while the overall macro will continue to be challenging, individual sectors and companies will be world class leaders in their respective fields. China is leading the world in renewable energy generation and electric vehicles. Nearly half of EVs sold globally were delivered to customers in Mainland China. China is the global leader in the solar industry, with its poly silicon, wafers, cells and modules accounting for between 76% and 96% of the global output. China’s PV capacity was 137.4% higher YoY in 1H22 and exports rose by 74.3%. We still remain positive on global solar demand. As China focuses more on core technologies, its chip industry is expected to replace about USD 430bn worth of imported chips — its largest source of foreign imports at the moment. Our key sectors of investment include those of core technologies, healthcare, and re-opening.
Trade and partnerships between India and China are not about to dry up
Most of the Indian manufacturers that we have spoken to during our current trip still work with and speak very positively about Chinese suppliers. Interestingly, Chinese have been meeting Indians in Thailand to conduct business meetings — a recent development as Thailand has some of the easiest quarantine rules for Chinese traveling to and from, and Indians cannot yet get visas to travel to China. We own Airports of Thailand, a good play on this business workaround. The manufacturers reiterated that freight rates have come down, and that supply chains have not been disrupted for their categories, and that they don’t think that localization can replace Chinese technologies in the next two years. Meanwhile the local demand for white goods and other consumables are growing rapidly and will require continued Chinese partnership. Even the localization that is happening is being led or in partnership with Chinese companies, and the Indians praised the Chinese for their efficiency and professionalism. We reiterate that the economies of scale and technological moats that are possible in China are difficult to replace and that such companies are currently undervalued.
China, by contrast, is at the very opposite end of the business cycle versus all other countries. Chinese valuations are deeply discounted, and the quality and technological advantage of the companies is still much higher than that of Indian companies, and the market size and per capita GDP are still much higher. We need to wait and see until after the Party Congress for greater visibility on the recovery of the Chinese economy, but from an investment, business cycle and valuation perspective, Chinese companies are still the better long-term opportunity at the moment.
We upgrade India’s long-term outlook and believe that the experience we have gained from the lifecycle of Chinese company development over the last 10-15 years will give us a unique angle on the future of this country. Having said that, we temper the long-term potential with short-term risks, as currently India is at the peak of its reopening and estimates still need to come down (the economy cannot keep growing at 13%).