Investment Analysis of China & India Stock Market

China/India Worst Performing Markets

I have a client who asked about why aren't we investing in China and India. Here is my reply to the client. I thought is a pretty interesting article, so I think sharing this article with you will have you understand about these 2 countries better.

Here is my opinion about China and India and why we are not investing heavily into these 2 big potential countries. There are a couple of reasons why we are not doing that:

1) The current portfolio already has a big component invested into China and India via Aberdeen Pacific equity (20%) and Aberdeen Emerging Market equity (27%). If we should invest into a focused China and India fund will further increase the exposure to these 2 countries significantly. At the present moment, we are not so positive about the stock markets of these 2 countries despite they are showing signs of reversal. China, India along with the other 2 BRIC economies, Brazil and Russia are some of the worst performing markets in the world, for very good reasons.

2) China is facing significantly headwinds with exports slowing down due to the Euro crisis and sluggish growth in US and a slowdown in its domestic market due to its tight monetary and fiscal policies to control inflation within the country for the past 3 years. The Chinese government has cut interest rates in the recent months and loosen the monetary policies in order to simulate the domestic consumption and to move away from an export oriented economy. However, the curbs for the property market are still kept in place in order to prevent further speculation and inflation on its property market. With the change of Chinese leadership due at the end of the year, the Chinese government will not execute any big sweeping reforms in order not to create problems for the handover and will instead, execute small calculated stimulus to promote growth and prevent unemployment within the nation. With the bigger issue of US growth slowing and Euro debt crisis, the measures may not be enough to turn the market around and sweeping measures will only be implemented after the leadership change. On the technical side, the Chinese stock market is trending strongly downwards and the bottom is yet to be seen yet. There's is always a saying in investment, "Never stand in front of a falling axe." and this is precisely what is happening to the Chinese stock market right now. We noted that the Chinese stock market is undervalued now and it has been in a bear market for the past 3 years and is due for a good rally should there be positive government intervention and an improving global economic climate. We are actively looking to allocate more funds into this market in the future but we will probably give it a miss in the near term.

3) India's problem is that of a structural and political problem. The country is in a serious need of a government reshuffle as the parliament is  paralyzed due to political infighting and is unable to implement any good economic measures to turn the economy around. The high inflation in India, at 9%PA and slowing growth is creating a potential stagflation scenario which will seriously erode the earning power the Indian citizens, while at the same time, is facing spiraling unemployment as the economy stalls. The weak rupee is also a very big concern from an SGD point of view. Rupee has depreciated 30% against SGD in the last 2 years and is still rapidly depreciating at the current moment. Any market rally in the Indian stock market may be offset by the currency losses. Between China and India, we believe that China has a much better potential given the will and decisiveness of the Chinese government to solve their domestic problems.