China is extraordinary - but here's why India's more attractive

Hugh Young, manager of the New India Investment Trust, sets out the case for the emerging market behemoth.

Recent figures from the sub-continent have told the familiar story of slowing growth.

In September, the IMF forecast India’s economy to grow 7.8% in 2011, down from its June forecast of 8.2%. India faces numerous challenges in its effort to industrialise. Even finance minister Pranab Mukherjee admits “uncertainties continue to persist”.

The parallels have long been drawn between India and China, the two emerging behemoths in Asia, and while some investors may see this as an indication that the growth in India cannot be sustained over the long term, in our opinion, as an investment destination, India remains more attractive than China largely to do with the drivers of Indian growth.

There is no denying China’s extraordinary economic performance; its economy has expanded 16.9 times in nominal US dollar terms over the last 20 years compared with just 6.3 times for India.

But China’s strong economic performance has not been reflected in its stock market. From its inception in December 1992 until August 2011 the MSCI China index fell by 10% in US$ terms.

The MSCI India index on the other hand has risen by 483%, approximately five times, over the same period. In other words, India’s stock market has kept pace with its economy while China’s has not.

Stakeholders

It makes sense in theory that stock market performance should mostly track corporate profits. It also makes sense that corporate profits should track revenues, allowing for periods of profit margin expansion or contraction.

The fact is that the minority shareholder is but one of a number of stakeholders in any economy, others being employees, central government, local government or local suppliers for example.

Where markets forces prevail and a strong shareholder culture exists, one should and can as a minority shareholder expect top line growth to be translated over time into growth at the bottom line.

Indeed this has been my experience over the years with India broadly, though of course at an individual company level a high degree of volatility exists, as one would expect.

China may see cracks

Unlike India, however, China does not yet have a strong shareholder culture, which can take many decades to build.

Furthermore China’s economy is a distorted one, with bank credit and interest rates determined not by the market but by the whims of its government.

Such distortions may have helped to generate economic growth higher than would otherwise have been possible but this has seemingly been at the expense of minority shareholders.