Last year, Frontier Investment Consulting’s deputy managing director, Kristian Fok, and head of investment research, Kim Bowater, undertook a study trip to China and India, which they have since ameliorated with extensive manager interviews and deskstop research. The asset consultant recently released to clients a comprehensive report on how best to build investment exposure to these emerging powers, which KIM BOWATER summarises below.
The concept of the BRICs countries (Brazil, Russia, China and India) was first coined by Goldman Sachs some years ago. The BRICs argument was that these large emerging markets would, over the coming decades, grow to be among the primary drivers of the global economy. While views on the fortunes of individual countries may vary over time, this idea continues to gain traction today in our own region in relation to China and India. These two countries are of particular significance as their large size means that their continued economic growth will create a meaningful shift in the balance of the world economy. The economic growth to date, and future growth potential, of China and India remains strong and well documented. Debate on specific risks to this growth potential have varied prior to and throughout the global financial crisis.
However, it is clear that these countries managed to avoid many of the problems that led to the financial crisis, and have demonstrated some resilience relative to developed economies. In relation to China, it is unlikely that this one market can rescue the entire global economy from current difficulties, and its own GDP growth may be lower than desired by its government in the near term. However, there appears to be a reasonable likelihood of China continuing to grow at a reasonable pace, despite the risks of falling exports and rising debt that may not be well targeted economically. While less strong fiscally, India’s more internal economy also has its own momentum and the basic drivers for the growth premise, such as its demographic advantage, remain in place.
Beyond the headlines Overall, we find the case for growth in China and India to be reasonably compelling. However, it is not a simple story and different risks face China and India, both in terms of ability to achieve outsized growth over the medium term, and in responding to the global financial crisis in the shorter term. There are also ESG (environmental, social and governance) risks that are heightened for emerging markets, including China and India. In particular, governance risks need to be considered carefully from an investment perspective. For the growth part of Australian superannuation portfolios, despite allocations to emerging market equities in many portfolios, current direct investor exposure to China and India is quite low and an increased tilt to these markets has some merit. We are cognisant, however, of indirect exposure to China, in particular via existing investments in Australia and globally, for example via resource stocks.