International Business:Dawning giants of global economics

COLTRANE · (#1 (**permalink**))

Sunday February 20, 2005
The Observer

If you are looking for economic growth this year, you need to look East.
India and China are, says Allan Conway, Schroders' head of emerging markets equities, 'economies on the verge of lift-off growth'. While Britain and the rest of Europe will struggle to achieve growth of 3 per cent this year, India will grow by more than 6 per cent and China by close to 9 per cent.
The growth will not stop there. Between them, the two countries have 2.4 billion people, or 40 per cent of the world's population.
These people provide a cheap, and highly skilled, workforce for western companies - think of Indian call centres and Chinese electronics. But they are no longer simply servicing the needs of affluent westerners; they increasingly want the trappings of wealth themselves. Domestic demand for everything from bank loans to telephones is growing sharply in both countries. Small wonder, then, that some pundits are predicting that within 20 years they could be the world's leading economies.
China

China has been hogging the headlines over the past year and it is not hard to see why. Since the authorities tacitly decided to embrace a capitalist structure, the country has been enjoying explosive growth: last year it slowed to 'only' 9.5 per cent and, between 1999 and 2004, GDP has risen by almost 66 per cent.
That has been driven by investment as virtually every major manufacturer realised that shifting production to China could slash production costs - foreign direct investment in the country is running at more than $50bn (£27bn) a year.

The impact of the production boom has been dramatic. On the import side, China alone accounts for 37 per cent of the world's cement consumption, 35 per cent of its iron ore and more than 20 per cent of commodities ranging from zinc to steel. Indeed, rampant Chinese demand has been pushing up the price of virtually every commodity, from gold to oil.
The export impact has been equally dramatic. From toys to TVs, more of what the world buys has been made in China. Wal-Mart, the US retail giant has more than $18bn worth of Chinese products on its shelves and is the country's eighth-largest trading partner, ahead of Russia and Australia.
Last year's fears that a bust would follow the boom have dissipated as the Chinese central bank succeeded in cooling the over-investment in some areas, such as steel, automotive and parts of the property market, towards more domestic-focused areas such as transportation and agriculture.
For investors, tapping into the growth is not straightforward. The Shanghai stock market is still relatively underdeveloped and 95 per cent of its companies are state-owned, which means their objectives are as likely to create employment in a particular region as to earn money for shareholders.
Corporate governance, and stakeholder democracy, are less developed than they are here, so investors look to Chinese companies listed on the Hong Kong market, such as Giardano, the Asian equivalent of Gap, China Telecom and China Life. China is still a communist country, and an emerging one at that, so investors should be prepared for a bumpy ride. Wilfred Sit, manager of Baring's China Focus Fund, thinks there is some 'short-term risk' for the stock market following a lot of speculation at the end of last year. Others warn that there could also be some disappointment over earnings.
But those with a long-term horizon - ideally at least 10 years - should benefit from exposure to the country's rapid growth.
India

India has a far longer history of private enterprise than China, so its stock markets and governance standards are much better developed, and its press as good as ours at wheedling out instances of corruption and malpractice. Its infrastructure, however, is far less developed, with everything from transport to telecoms lagging behind. In 2002, there were just 52 phones per 1,000 people, compared with 328 in China and 1,335 among EU members.
Its tax regime has also been far less welcoming to overseas investors, attracting $3 billion of foreign direct investment a year, a fraction of what China receives. So far, however, investors are happy that the recently elected Congress party is carrying on the reform process set in train by previous governments.
Nick Moakes, who runs a number of funds in the region for Merrill Lynch, says India is now investing heavily in infrastructure but it will never challenge China as a manufacturing powerhouse. Instead, its strength is in outsourcing and ser vices, not just call centres but also software services and back office support. Some of its growth will be driven by consumers who are now showing a willingness to borrow to finance new cars, two-wheelers and houses.
While China is accessed through other stock markets, investing in India means buying on the Bom bay exchange. Stuart Parks, an expert on the region at Invesco Perpetual, thinks there are more attractive opportunities in India at the moment than in China. He likes banks such as ICICI, which grew by 40 per cent last year, and Mico, a subsidiary of the German Bosch engineering group.
Perhaps the biggest risk in India is its high borrowings - roughly 5 per cent of GDP - which limit its capacity to pursue its reform programme.
Like China, it still has a huge agricultural population which contributes substantially to its GDP. So, as Kirsty Watt, Martin Currie's Indian expert points out, something as basic as the monsoon still presents a signi- ficant investment risk.
Don't go it alone, you need help out there
The best advice for those who want to add India or China to their portfolios is: don't try this at home. Even if it was possible to invest directly in the countries' own markets - and both are open only to their own citizens or professionals with permits - sorting out the good from the bad would be very difficult.
Hugh Young, who heads Aberdeen Asset Management's respected Asian team and has been investing in the region for more than 20 years, says the key for him is to 'make money in emerging markets without losing it'. That means he visits every company, analysing its business thoroughly before he decides to invest. No retail investors will have the time, never mind the opportunity, to do that kind of work.
The best approach, therefore, is to buy through a fund. There are a few that invest solely in one of the two countries and these may be suitable for wealthy investors who can afford to have a number of emerging market funds in their portfolios.
But most will be better off with a general Asia-Pacific fund, which invests across the region. These will reduce the risk as the manager has a wider choice of stocks and can shift resources from country to country to cope with unexpected changes in growth patterns.
Justin Modray at Best Invest is particularly keen on Aberdeen's funds as he likes Young's cautious approach. He picks Young's New India fund and its Far East Emerging Economies, as well as highlighting First State's Greater China Growth fund and Martin Currie's Greater China fund.
Tim Cockerill at Rowan Capital Management says his clients have become more interested in China particularly and thinks it is worth having an exposure to the region. He cautions that the funds are now looking expensive, following a good regional performance last year. He highlights JP Morgan Fleming's India investment trust and Gartmore's Chinese Opportunities among single-country funds. Among general funds, he likes the conservatively managed Lincoln Far Eastern fund.

okaforworld · (#2 (**permalink**))

This is good information but my mind is set in African countries like Ghana.