CONTRIBUTORS
Lirong Xu, CFA
Chief Investment Officer
Franklin Templeton Sealand Fund Management Co.
Murali Yerram
Portfolio Manager, India
Franklin Templeton Emerging Markets Equity
Brian Freiwald
Portfolio Manager
Putnam Emerging Market Equity
Introduction
As investors consider opportunities across global equity markets, China and India both offer a combination of strong potential growth and independence from the US economic and market cycle. At the same time, investors should be aware of the important differences between these two large Asian economies. While China has achieved a higher long-term economic growth rate, India has a track record of delivering better equity returns. Also, India has accelerated its pace of development in recent years, while China has struggled with shifts in global trade patterns as well as from home-grown debt and deflation.
To compare current prospects for equities in China and India, in this paper, we share perspectives from three Franklin Templeton professionals with experience investing in these markets.
Lirong Xu
China’s economy is recovering, and entrepreneurial spirits are rising
As China emerges from a sustained economic downturn, we believe global investors should take notice of its strong growth potential and reasonable valuations. The real estate market had a hard landing over the past two years, which caused worries that the overall economy would fall into outright contraction. Fortunately, real GDP growth has stayed positive. It turns out that China is more resilient than it was a decade ago. This is one reason we have optimism that, over the next three years, we could see a solid recovery for both China’s economy and its stock market.
Our view differs from market consensus, as global investors continue to show caution about investing in China. Even with the brief rally in the third quarter of 2024, China has not followed the same late-year upward trend as the United States. Valuations in China have remained low (Exhibit 1), as have the correlations with global markets. We believe many global investors may be undervaluing Chinese stocks, but from our perspective, this reinforces the opportunity to invest at a potentially favorable time.
Exhibit 1: China A Shares Offer Lower Valuations than India and Other World Markets
Price-Earnings (P/E) Ratios of MSCI Index
As of December 31, 2024
Source: MSCI. Data as of December 31, 2024. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not necessarily indicative nor a guarantee of future performance. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. See www.franklindatasources.com for additional data provider information.
As investors, it remains important to be selective. We follow a patient, research-driven approach, applying our local expertise. Many of the most attractive companies in China, we believe, are privately held. In doing our research, we talk with private and public companies and with their suppliers, customers and even their former employees to determine which ones are well managed. We think firms such as these will have an advantage as the recovery gathers pace. Another area of good news for China is that policymakers are making progress on the debt and deflation problems. We think the economy will be on a better footing than in recent years.
Murali Yerram
Indian stocks benefit from multiple tailwinds
It is an interesting time to see how China and India stack up against each other. Over recent decades, China has significantly outperformed India in terms of economic growth, while India’s market has delivered better returns to investors (Exhibit 2).
Exhibit 2: India Led in Market Performance, China Led in GDP Growth
Historical GDP Growth Versus Annualized Market Returns in India, China and Developed Markets
Sources: Bloomberg, WEO, IMF, MSCI. As of 2023 (most recent data available at time of writing). Total returns are shown in US dollars, with India represented by the MSCI India Total Returns Index, China represented by the MSCI China Total Returns Index and developed markets (DM) represented by the MSCI World Total Returns Index. DM GDP growth rate is based on countries in the MSCI World Index excluding Hong Kong and Singapore, calculated based on weightings in their respective GDP based on purchasing power parity. India’s GDP growth is based on fiscal years as forecasted by the IMF, with FY2022/2023 (starting in April 2022) shown as 2022. For illustrative purposes only. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. See www.franklindatasources.com for additional data provider information.
India’s stock market is inherently different from many emerging markets and from China. One of the chief reasons is that government sector involvement in India is quite low, while, if you look at the MSCI China A Onshore Index, the proportion of government-owned companies was 47.7%.1
Another difference in India is that energy and basic materials companies also comprise a relatively low proportion of the market—about 15%.2 Companies in these sectors create hardly any long-term alpha. Fortunately, in India these sectors have been less of a drag on returns when compared with other markets.
While India’s economy and market have a history of strong performance, we believe the best is yet to come. The nation held an election in 2024, and the policy framework is now settled for the near term. India is benefitting from a variety of tailwinds at this time, and it offers a very attractive structural opportunity to global investors.
Brian Freiwald
Bullish on India, cautious on China
We believe both India and China deserve attention for their growth potential relative to developed markets. Investing in either or both countries could help to expose a portfolio to different drivers of growth.
In comparing the two, we find India more compelling. Over the past 20 years, India’s GDP growth has averaged about 7% per year, which for equity markets has translated into earnings per share growth of about 10% per year. We anticipate future growth rates will be near the same levels. India’s equity market also offers attractive valuations, in our view. Many global portfolios are still what we could consider to be underweight in Indian equities.
While China’s economy is growing, we believe the earnings outlook for equities could remain lackluster for the foreseeable future. At the same time, we recognize that it’s a large market, and there will likely be select opportunities for strong earnings growth. We consider China a stock-pickers’ market that requires careful research and analysis. The opportunities in India may be more widespread, while in China a more selective strategy makes sense.
Conclusion
Overall, our three investment experts believe that, while the economic and market dynamics are not equal, both India and China offer opportunities for global equity investors. The world’s most populous nations are moving forward at different speeds, but both are likely to grow faster than developed markets. They offer different characteristics that warrant distinct strategies but also allow for attractive diversification potential. As described, one of the key differences is that India has resolved many of its policy questions in the wake of its election in early 2024, while in China, the policy picture is more complicated. The government has instituted several measures to overcome the challenges of debt and deflation and has achieved a degree of success, but it may also decide to do more. One possibility is to introduce reforms to stimulate stronger consumer demand. China’s economy is growing, but investors may want to keep alert to future policy decisions that could have an effect on the nation’s growth trajectory.
Endnotes
- Source: Based on MSCI China A Onshore Index as of July 2024.
- Source: MSCI India Index Factsheet. The energy sector represented 8.28% of the index and the Materials sector represented 7.3% of the index as of December 31, 2024.
INDEX DEFINITIONS
Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms are available at www.franklintempletondatasources.com.
- The MSCI China A Index captures large and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges.
- The MSCI China A Onshore Index captures large- and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges.
- The MSCI India Index is designed to measure the performance of the large- and mid-cap segments of the Indian market.
- The MSCI Japan Index is designed to measure the performance of the large- and mid-cap segments of the Japanese market.
- The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the US market.
- The MSCI World Index captures large- and mid-cap representation across 23 developed markets countries.
WHAT ARE THE RISKS
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.