Global Report

For emerging market investors, India is the new China

All emerging markets are cheap today, but it’s the subcontinent that has the momentum

People at Chowpatty Beach with the Mumbai skyline in the background.

People at Chowpatty Beach with the Mumbai skyline in the background. (Dave Abram/Getty)

Among emerging markets, China has long stood apart. Over the past two decades, Chinese GDP has exceeded 10% eleven times, while India’s only cracked that mark once.

Now, though, a new chapter is being written. China’s growth has underwhelmed over the past couple of years; 7.5% GDP growth is the norm today, and it’s trending lower. Two of the other BRIC nations, Brazil and Russia, whose resource-based economies are strongly correlated to Chinese demand for raw materials, have likewise struggled lately. The standout among big emerging economies is India, whose growth rate, while still lower than China’s, is on its way up, says Christine Tan, an emerging markets portfolio manager at Excel Funds Management.

Capital inflows are, for the first time, trending in India’s favour. In 2014, more than US$2.2 billion flowed into India-focused funds, while China saw US$1.8 billion. That’s a big switch from the longer-term pattern: Since 2004, international investors have pumped US$55 billion into China-focused funds versus US$19.5 billion targeted at India.

The changed expectations show up in valuation multiples too. China’s index is trading at 9.5 times earnings—it’s the second-cheapest emerging market country next to Russia—while India is trading at 16 times, making it one of the most expensive developing nations.

A big factor in that role reversal can be summed up in one name: Narendra Modi, India’s prime minister since May. During Modi’s visit to the United States in late September, he was given a rapturous reception by thousands at a packed Madison Square Garden. His fans compare him to Britain’s Margaret Thatcher and Singapore’s Lee Kuan Yew.

Modi is a reformer who puts a premium on government efficiency and tight budgets, says Louis Lau, Brandes Investment Partners’ director of investments. In the past, India’s potential was perceived to be held back by bureaucracy and a lack of infrastructure. “He’s trying to jump-start a lot of good reforms on infrastructure, tax and other initiatives,” says Lau.

Meanwhile, China has pulled back on the infrastructure spending that got it through the recession. The country is in the midst of moving from an export-led economy to a domestic-led one. That transition typically results in slower growth, at least in the short term.


Investors should continue to look at both of these countries, advises Tan. The long-term story of growing middle classes that want to buy more goods still holds true, she explains. Right now, though, she is overweight India and market weight China. For the time being, growth investors will want to look at India, while value buyers might find more opportunities in China. In the latter country, look for domestic-focused operations, such as jewelry stores, auto manufacturers and retailers; Lau has found some that trade between 10 and 12 times earnings. In India, infrastructure companies and financial firms could be big beneficiaries of Modi’s reforms.

Now is a good time to get into both countries. Developing-nation stocks were hammered during the autumn volatility, but should rise again as the long-term story plays out. “Emerging markets are always more volatile than domestic ones, but these [two] economies are still growing,” Tan says.