Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking with portfolio advisor Ross Cameron of Northcape Capital, comparing the emerging market giants India and China, which appear to be on two very different economic paths. We talked about the wide disparity in their demographics, markets and prospects. And we started by looking at what’s going right for India.

Ross Cameron (RC): India is a classic emerging market. When you think of the fundamental appeal of emerging markets, India ticks all the boxes. It’s a young, growing population, with very low levels of indebtedness, and these structural trends — urbanization, technology, infrastructure, stable politics and market-friendly policies. And so India is a very good place to invest in, and continues to be.

[Prime Minister Narendra] Modi’s philosophy has been that a rising tide raises all boats. And so he’s really focused on getting that flywheel of economic growth going. The big thing that Modi’s done — and we haven’t yet seen the results of it, but we will — is the infrastructure. This was an area where India serially underperformed, particularly in comparison to its big neighbour, China. Modi has recognized that. There are so many bottlenecks in the Indian economy that he has addressed.

One is, for example, the simplification of the GST tax system. It used to be the case that each state had slightly different rules around GST. And so when you shipped goods, every single time you crossed a state border, you would have to offload the goods and work out the various GST tax implications. That’s been normalized. That makes logistics much easier.

And to just pick one of his many, many projects, it’s this high-speed rail corridor between Delhi and Mumbai. Previously, the travel time between the two biggest cities in India was more than 24 hours. It could be up to 48 hours. And with the high-speed rail corridor, that will reduce the travel time to 12 hours. A big increase in efficiency and productivity.

Same with the investments in the road system and the investments in ports. So really a lot of Modi’s policies have been about building a foundation for economic growth going forward. And we’re starting to see the signs of it. This year, we expect to see a slowdown in the global economy. The U.S. is likely to have a soft year, perhaps a recession. And yet the average economist expects that India’s economy will grow 6% in real terms this year, which is double-digit nominal GDP growth. And so that’s a very impressive outcome in a global economy that’s going to be flattish.

Headwinds for China investment

RC: We think of the classic checklist for the appeal of emerging markets, and we go through them and score China. Demographics? Well, China ranks very poorly. China’s fertility rate is below that of Japan’s. Remember, Japan is the poster child for bad demographics. But China’s fertility rate is actually even lower.

Emerging markets often have appeal because of low debt levels. China is a very indebted economy. Everywhere you look, significant government debt, very significant corporate debt —one of the most-indebted corporate sectors in the world — and then a fairly indebted household sector as well.

When we look at short-term indicators of the Chinese economy, youth unemployment is very high. And then you have the issue with the property market, where the data just continues to be very weak as a consequence of loss of investor confidence.

And so, it’s difficult to see the Chinese economy ever growing like it did in that boom period — you know, the 10-years following the GFC and the 20 years before the GFC. Those type of growth rates, those are gone and they’re not coming back.

The bottom line on investing in India versus China

RC: India finished the year up 17% in Canadian dollar terms. On the other side of the ledger, China declined 15% in Canadian dollar terms. The big picture here, of course, is that here you have the two most populous countries in the world, but that’s where the similarity ends. They couldn’t be more different.

India is a vibrant democracy with a strong rule of law, with excellent demographics and low credit penetration. And China is not. China is an authoritarian system with poor demographics and very high levels of indebtedness.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Ross Cameron of Northcape Capital. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


Go back to the article.

Emerging Markets Concentrated Equity - segregated fund
Canada Life Emerging Markets Concentrated Equity Fund - mutual fund
Concentré d'actions des marchés émergents - fonds distinct
Fonds concentré d’actions de marchés émergents Canada Vie - fonds commun de placement