VP and portfolio manager at AGF Investments sees headwinds to China's leading position in emerging-market growth
While Chinese equities have benefited from a remarkable rally last year – supported by China’s true V-shaped economic recovery from the COVID-19 pandemic’s impact, a narrative of warmer relations with the U.S. following Trump’s defeat, and other factors – investors that have ridden the Asian superpower’s growth story may want to consider India as their new preferred area of emerging-market exposure.
In a new market commentary, Regina Chi, vice president and portfolio manager at AGF Investments, noted that China was the sole major economy in the world to come out of 2020 in a position of economic growth, with an estimated growth rate of 2.3%.
“Yet the important question now is what happens next,” Chi said. “And when we look forward, we believe future China stock returns might be moving into a more modest period.”
The MSCI China Index, she noted, outperformed the broader MSCI EM Index in January, with the two benchmarks registering 7.4% and 3% returns in dollar terms for the month, respectively. Looking back over the past 12 months, the China index rose by 46% while the broader EM index went up by 28%.
“[W]e suspect that the good news on COVID and whatever optimism is justified on the trade front have been largely priced into the market,” Chi said.
She also questioned the notion that the Biden administration would amount to anything more than a slight thawing of icy U.S.-China relations. Aside from the persistent anti-China sentiment in American public opinion, she pointed to Biden’s hawkish picks for top cabinet posts on China, including Secretary of State (Antony Blinken), Commerce Secretary nominee (Gina Raimondo) and the newly created role of Asia policy co-ordinator (Kurt Campbell). National Security Adviser Jake Sullivan, she added, has already spoken out against China on human rights, technology, trade, and Taiwan.
“In contrast, we see significant potential for India’s economy and its equities,” Chi said. “The MSCI India Index has performed strongly over the past 12 months, rising about 21%, Bloomberg data shows, but structural reforms under Prime Minister Narendra Modi could bear further fruit going forward.”
She pointed to the Make in India 2.0 initiative unveiled last year, which calls for more private capital and foreign direct investment, the opening-up of agriculture, and lower taxes for manufacturers, among other programs. New labour codes passed by the Indian parliament in fall, she added, are likely to make doing business in the country easier, as well as lead to a sharp step-up in financial inclusion of the masses, eventually helping establish a credit history for the historically “unbanked” cohort that makes up a large chunk of India’s population.
“In manufacturing, we see particular promise in India’s pharmaceutical sector,” Chi said. With more attention being paid to creating robust pharma supply chains, she said Modi is taking steps to make India a major player in the global active pharmaceutical ingredient market. The country’s FY22 Union Budget released earlier this year, she added, reflects a focus on growth and a relaxation of the government’s medium-term fiscal consolidation targets.
“In advancing a case for India, we are not suggesting that the rally in China stocks has definitively run its course; we are merely suggesting that the days of China as an investor’s emerging-market darling might be numbered,” Chi said. “Even if they are not, its volatile stock-market history argues for diversification.”