Q&A: Emerging Markets Powerhouses China and India
Given their heft in the emerging markets world, China and India are among the countries I get asked most often about, particularly when they show market distress signals like economic slowing. This past week, the Templeton emerging markets team and I have been in China as part of a large research trip, doing further analysis on the market and key company prospects. I thought it would present a good opportunity to share a few of my answers to recent questions on both China and India.
Do you expect the Chinese economy to slow down further?
The Chinese economy grew 7.5% year-over-year in the second quarter of 2013, in line with the government’s growth target for the year. Although the Chinese economy may be growing at a slightly slower pace than in the first quarter, when GDP grew 7.7% year-over-year, China’s GDP growth remains stronger than in many other major markets, which we believe could remain the case for some time. Moreover, on a positive note, China has been slowly becoming less dependent on exports and adjusting its structure for more sustainable growth.
There are a few reasons why my team and I believe China has the potential to maintain strong long-term economic growth. For instance, as disposable income increases for China’s middle class—many consumers in China have been benefitting from annual increases in wages of 20% or more—more personal assets could be funneled into savings and investments.
In addition, urbanization is continuing apace, with the government devoting more resources to infrastructure and subsidized housing as well as extending social security, education and health benefits to migrants who have moved to cities.
Also, we anticipate the authorities will continue to reposition the Chinese economy to depend less on export and investment spending and more on domestic demand. Efforts to tilt activity away from low value-added and labor-intensive industries and toward higher-technology activities will likely continue as wage levels move up and as the labor force in China becomes ever more educated.
What are your views on the weakness of the A-share (domestic) market in June?
A-shares are those of local Chinese companies denominated in Renminbi, traded primarily between local investors on the Shanghai or Shenzhen stock exchanges. We suspect the recent weakness in Chinese A-share prices is an overreaction to recent events. Indications that US quantitative easing might be scaled back can be seen as a sign of growing confidence in the sustainability of a US economic recovery, which would be positive for Chinese exporters. Moreover, Japan’s measures of monetary and fiscal stimulus that are due to increase in coming quarters could help offset any potential tapering of US liquidity. Similarly, the People’s Bank of China’s actions to influence interbank rates, by curbing some excessive “shadow banking” activities, could create healthier and more sustainable financial markets. We have already seen a rebound, with the A-share markets on an upward trend since the end of June through mid-September1.
In a market of China’s size, the story isn’t all good or all bad, thus it would be wrong to generalize the market. Over the long term, we believe there should be a rising trend in the outlook of the A-share market since China’s economic growth rate currently remains high and market reforms appear to be on the right track. According to our analysis, equity valuations overall are currently not much above their 2008 lows, and we believe that many of China’s A-shares are attractively priced at the moment.
The Rupee reached record lows in August, making it one of the worst performing global currencies so far this year. What is your view on the weakness?
It is true that the Rupee has weakened recently. Some of the weakness is symptomatic of the country’s poor policy and investment environment. If that is rectified, we believe the Rupee can once again be more stable. The weakness in the currency can be good for certain investments. For example, the weak Rupee is excellent for India’s outsourcing industry that has its costs in Rupees and income in US Dollars. So our interests in such companies have risen.
There have been fears of a downgrade in India’s credit ratings. What do you think the chances are of that happening?
Rating agencies generally look at a country’s current environment and could take action based on that country’s current prospects. It is for the government to make its case that the economy’s long-term fundamentals are intact.
Do you expect inflationary pressures to increase in India amidst slowing economic growth, a depreciating currency, rising interest rates and higher commodity prices?
My team and I believe the government must counter inflation by improving productivity. That is an ongoing task. There is no reason a country that makes some of the cheapest and highest quality medicines and is the software and services factory to the world should not be able to manufacture goods at a competitive cost.
What can the Indian government do to tackle the depreciation in the Indian Rupee this year, high fiscal and current account deficits and slowing economic growth?
We believe it is most important for the Indian government to do all it can to harness the significant potential that India has. The fact remains that India is a net exporter, barring its energy requirements. We should not be too concerned about the current account deficit and we should avoid any knee-jerk reactions. In our view, what needs to be done is to ensure that the many Indian and multinational companies that truly want to make investments and make a difference to India make the right level of investments. We believe the government must slowly reduce the extent of public sector involvement in the economy and allow private enterprise to make investments. This could lead to an increase in productivity, then growth rates should improve and the currency should likewise strengthen, in our view. It is heartening to note that the government is finally taking steps to liberalize investments; however, that should not be done just to increase inflows, but also to enhance efficiency and productivity.
1. Past performance does not guarantee future results.