China and India: Is the Party Over?

04/17/2008 12:00 am EST


Edmund Harriss

Portfolio Manager, Guinness Atkinson Asset Management

A panel of Asia experts assessed the near- and long-term opportunities in China and India

In the past 30 years, both China and India have experienced an economic resurgence that is astonishing. Edmund Harriss, investment director of Guinness Atkinson Asset Management and manager of three Asia funds, observed that it took 60 years for income to double in Great Britain and 50 years in the US. But in China, income has doubled in the last ten years, and it will redouble in each of the next decades until 2030, when it will start to level off.

The primary focus in China since the 1970s has been to improve productivity, utilizing its vast pool of labor. In the second stage, they invested dramatically in infrastructure. In just the last ten-to-15 years, China has invested 40% of their GDP in infrastructure. Now, in the third stage, they are creating an environment conducive to investment.

Foreign investment, currently around $60 to $80 billion a year, is growing, but domestic investment is huge, about 40% of gross domestic product (GDP), which itself has grown at 9% per year for the last 30 years.

Low-tech manufacturing is now moving to higher value-added production as the low end faces increasing competition from Africa, Bangladesh, and Indonesia. The Chinese middle class—currently 80 million households strong—is rapidly expanding and is expected to top 280 million households (about 900 million people) by 2015. That will greatly increase demand for all products and resources.

Harriss cautioned that investors must be careful which shares and market they invest in. The best way is to buy shares listed in Hong Kong, then Singapore and the US. China’s domestic markets are open only for domestic investors, and have moved up strongly in the past 18 months to two years.

Pratik Sharma, Atyant Capital Management, told attendees that the party also wasn’t over in India. He believes India remains a compelling investment due to its structural, cultural and infrastructural changes.

On the pro side, Sharma sees several enticing aspects:

  • India has Asia’s oldest stock exchange.
  • It’s a democracy.
  • Entrepreneurship is well established, with the second highest number of entrepreneurs in the world.
  • India operates under the rule of law.
  • 80% of the population is under the age of 45, with half younger than 25, boding well for future consumption.
  • Just 13% of India’s economy is export, so the country is not so dependent on other economies.

There are currently some 7,000 listed equities in India, and companies are required to file quarterly and annual statements. The country’s capital markets are very advanced, and trading is done electronically.

India has gone through significant reforms over the past couple of decades. Now the big story is the 700-to-800 million Indians who live off the land and who are increasing their standard of living. That’s the big opportunity ahead, as their consumption for everything ratchets up.

But investors must be aware that liquidity in India falls off a cliff after you get past the top 300-400 companies. Institutional investing is still in the early stages, primarily in retail in the small- and mid-cap space. This lack of research provides an opportunity for investors, as many securities suffer from inaccurate evaluations—often trading at three-to-four times earnings, but generating big returns.

Sharma advised attendees not to expect growth to follow a straight line up, but the party is far from over. The questions to ask are: Is the growth real? Can it be sustained? Is there likely to be a crash? What changes need to be made to sustain the growth? Can society cope with changes? When should you invest?

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