By Mike Stringer
When we think about the two emerging giants of the East, historically most have gravitated towards China. About a year ago I invested a sizable sum of my investment capital in India. Many people have since asked me why, as if I’ve committed a cardinal sin by breaking from conventional wisdom or thinking, but for me that was the primary factor prompting my decision in the first place — the fact that too many people were either in China or were about to be. In the investing arena it’s sometimes better not to follow the flock and blindly subscribe to conventional thinking. After deciding on India, I then set about searching for the best asset management firms with the best funds and fund managers.
I settled on the India Fund with Jupiter Asset Management. Launched in early 2008, the fund is too young to have earned it a Morningstar rating, but the fund manager is Avinash Vazirani. He has a long and proven track record of consistently outperforming the benchmark. He managed the Peninsular South Asia Access Fund for BNP Paribas (BNPQY.PK), where he grew that fund by 1,437% over a ten year period. He was also the CEO at GEM Dolphin Investment Managers from 1994 – 1997, before it was sold. In 2005 he founded Peninsular Capital Partners LLP and joined Jupiter Asset Management in 2007. An impressive track record indeed, and enough to convince me that he was the right choice.
For many people, the crisp and modern infrastructure of China, along with the country's overwhelming ability to adopt new policy and practices at breakneck speed, and with seemingly little effort, have been enough for them to park their money there. It is important to point out that this is merely window dressing and hides growing internal problems which we will explore later. Furthermore, China has always pumped a lot more money into its infrastructure, 11% of its GDP as opposed to 6% for India. Last but not least, it’s important to remember that China has roughly a ten year head start on India. It began its awe inspiring growth back in the early 80s, India began in the 90s.
It’s very true that China’s infrastructure and cities are far more advanced than India’s, as China’s economy has seen 9% GDP growth for the past 30 years, but India has never been far behind in terms of economic growth, averaging around 6-7%, and is pumping huge sums into developing its infrastructure. For me though, the Chinese economic model has reached its pinnacle and cracks are beginning to appear.
The two countries have always adopted completely different approaches to growing their economies. Let’s explore this further. China has a very poor democratic track record, decision making is always done by central government and passed down to its tightly regulated state owned banks and businesses, which then obediently comply. The state is huge in China, which is a reminder of its Communist past. The advantage of this has always meant that China has been able to implement policy changes and huge investment initiatives with extreme efficiency, but huge sums of money are wasted amongst the bureaucracy and red tape.
India by contrast has always been deregulated with decision making taken locally and democratically. This has meant that decisions often take a long time to be made, but all of India’s financial and Commercial Institutions are managed independent of central government. India’s largest companies today started out as small independent start ups. It’s no doubt a country that fosters, values, and indeed practices entrepreneurship with great vigor. The advantage with this is that Indian companies utilize capital with far greater efficiency, with little to no waste, in stark contrast to its behemoth neighbor to the north. Essentially, India’s economic model has a great deal more in common with that of the West, particularly the United States. Think about it, it was a bunch of small businesses run by energetic and innovative entrepreneurs that propelled America along a trajectory which led it to superpower status in a relatively short period of time. No reason it can’t happen again.
Both economic models have proven themselves effective at growing and developing their economies. That’s crucial to most investors. Growth and the consistency of it are the magnets in attracting investment.
I strongly believe China is in for a rude awakening, and soon. I want to draw particular attention to the recent global financial crisis of 2008. That crisis began in the U.S. and quickly emanated outward like a blast wave, to infect the rest of the world. As a result, India has surprisingly emerged from it and indeed dealt with it much better than China. Since the crisis Chinese stocks have performed poorly. The reason for this is one of my reasons for not investing in China. The fact remains that the country is and has been for some time over-reliant on exports to the West. About 35% of China’s GDP stems from exports. With the West still in trouble, China has lost much of its growth over the past 2 years. India on the other hand has for the first time seen its GDP overtake China’s, growing 9.2% in 2010. India exports account for only 24% of its GDP and internal consumption accounts for a massive 57%. In China, internal consumption accounts for 35%. In other words, India will continue to grow whether Western consumers tighten their spending or not. This is where we start to see the true picture, with India proving to be far more self-sufficient. Suddenly, India seems like a safer bet with a much more sustainable model for growth. Furthermore, China has pumped huge sums of money into its economy, with its stimulus package constituting 6% of GDP, and India only 3%.
It should be noted also that China is facing an impending financial crisis of its own. During the past year or so, while the rest of the world has been tenderly licking its wounds from the great recession, Chinese banks have been loaning vast sums of money to Chinese consumers in an attempt to compensate for sluggish export sales. The Chinese government recently announced that 20% of all loans made will likely be non-performing. A more realistic number of 30% of loans turning sour could well bankrupt the entire banking system. Even conservative estimates have put bad loans at a staggering 8% of GDP, more than double what the savings and loan crisis amounted to in the United States. Food for thought indeed.
Clearly, my position hasn’t changed. My money will be in India for the long term. I also believe, further to the observations above, China will cease to become an attractive destination for Western corporations looking for cheap labor, which has been the magnet for so long. I believe that China will be unable to keep its currency from appreciating for much longer and will see more internal pressure from unions for higher wages and better working conditions, as seen earlier this year. China is about to sail through some very choppy water.
Disclosure: Long Jupiter Asset Management’s India Fund
