Can China and India drive a new chapter of growth?

Darius McDermott 23/10/2024 in Asia/Emerging Markets

Asia remains the fastest-growing region in the world. At 5.4%, its growth is faster than both emerging markets (4.3%) and developed markets (1.7%)*. It remains a fertile source of opportunities, but has been held back by the weakness in China, and the strength of the dollar. With these clouds clearing, can Asia finally realise its potential?

There has been considerable disparity among active funds in the region, depending on whether they have prioritised China or India. There is a 61% gap between the top and bottom-performing funds in the IA Asia ex Japan sector over the past three years**.  The top-performing fund is Jupiter Asian Income, which has no China exposure at all**.

Watch: Why this fund manager is no longer investing in China

However, more recently, the China problem has started to fade. China’s stock markets have been resurgent after the government announced a variety of economic stimulus measures, including lower interest rates, support for the property market and measures to encourage consumer spending. The Shanghai Composite is up 19% in a single month***.   

This leaves active managers in the region with a clear dilemma – plump for high growth, but expensive India, take a chance on a resurgent China or find something completely different? Jonathan Pines, manager of the Federated Hermes Asia ex Japan Equity fund, says: “In Asia, there is an enormous divergence in returns and some extremes in valuations. Looking at the market today, some parts are, we would argue, expensive. Other parts are extremely cheap and, in our view, more than discounting the risks.”

He highlights the problems with the Indian market: “If we were top-down investors then maybe we would choose India as the market we like the most. It’s got a large democracy, a business-friendly government, good relations with the West, and certainly companies that have delivered decent earnings, but we don’t like the price. And on a current multiple, at 25x price to earnings, it’s the most expensive major market in the world.”

In contrast, China is cheap, even after its recent rally. Dale Nicolls, manager of the Fidelity China Special Situations fund, says: “While less extreme after the recent move, valuations in China remain compelling relative to history and to global peers. I believe there is still ample room for valuation multiples to expand further.

“While the earnings outlook for China in aggregate is not bad in a global context, and there have been strong results in areas like technology, the general trend of earnings revisions has been downward. The hope would be that these policies can help drive a turn in economic fundamentals, leading to an improved earnings outlook. Such a virtuous circle would almost certainly drive a sustained improvement in market sentiment and further re-rating.”

There are unquestionably still risks in the Chinese market. About the only thing both Republicans and Democrats agree on is the imposition of further tariffs on China. Its relations with the West are testy,  while Chinese companies remain subject to the whimsy of the administration. There are even reports of corporate leaders deliberately devaluing their own share prices in order to avoid government scrutiny.

Nevertheless, Jonathan is coming out in favour of China, believing the risks are well-represented in the price. “China is going through a tough transition but one that may well deliver a more stable and modest growth outlook than it has recorded historically, but one that’s sustainable and fitting for an $18 trillion economy.”

Of course, the region is not just limited to China and India. It is worth noting that 55% of the MSCI Asia ex Japan index sits outside these two behemoths^. Jonathan says: “In Korea and Taiwan, there are some technology powerhouses. It is very difficult for America’s leading multinationals and technology companies to do what they do without their Korean and Taiwanese suppliers.”

There is also the ‘China plus one’ story, which is playing out across the region, but particularly in South-East Asian markets such as Vietnam, Indonesia and Thailand. Roddy Snell, manager on the Baillie Gifford Pacific fund, says: “Vietnam has the best structural growth story of any country in Asia or the emerging markets. That’s because it’s got a great location, a young cheap workforce, about half the price of Chinese labourers. A government that can get things done and that’s all come together to make Vietnam have a successful export manufacturing base. They’re clearly a big, big beneficiary of companies now looking to relocate out of China. It’s really accelerated this story.”

Roddy also believes that many of the headwinds that have been holding Asia back over the past couple of years are dissipating. This is not only the China problem, but also the dollar problem: “The US dollar has been at its highest level in decades. That has historically been bad for Asia and emerging markets. It’s sucking liquidity away and it’s very hard for Asia to outperform in that scenario.” While it is difficult to predict the turning point for the dollar, falling interest rates and endlessly rising debt levels are likely to put downward pressure on the US currency. Roddy is optimistic it will fall from here.

The path ahead looks better for Asia from here. It may well benefit if investors turn away from the US in the wake of a fractious and divisive election. Plus, it is a rich source of thematic opportunities – from China plus one, to the growth in semiconductors and the energy transition.

We continue the China debate on the Investing on the go podcast: 

*Source: International Monetary Fund, July 2024

**Source: FE fundinfo, 21 October 2024

***Source: Shanghai Composite Index, percentage total returns, 23 September 2024 to 21 October 2024

^Source: MSCI index factsheet, 30 September 2024

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.