It’s been a little over a year since Narendra Modi took office in India, and so far the results have been mostly positive for the South Asian country and the surrounding region. Among other achievements, Modi’s government has managed to enact important policy reforms, increase public investments in infrastructure, lower food inflation and generally open India up to business on a global scale.
CLSA’s chief equity strategist, Christopher Wood, gives the country accolades in his most recent newsletter. Wood writes that while “the halo effect has come off the Modi phenomenon” somewhat, India nonetheless remains “the most promising major emerging market story on a five- to 10-year view globally.”
Looking ahead, analysts forecast that India’s economy will expand between 7.5 percent and 8.5 percent for the 2015 and 2016 fiscal years, faster than any other G20 nation, including China.
This is growth that can be sustained for the long-term, a topic I wrote about last October. According to the International Monetary Fund, within the next decade and a half, “India will have the largest, and among the youngest, workforces in the world, and will need to create jobs for the roughly one hundred million young Indians who will enter the job market in the coming decade.” By 2050, India is expected to be the world’s second-largest economy based on purchasing power parity, following China.
Global investors recognize these positive data points and are piling into Indian equities, especially now that aggressive monetary easing in the country seems likely. CLSA’s Wood points out that $737 million a month on average have flowed into India-focused mutual funds since Modi took office last May, a dramatic reversal from the amounts seen prior to that.
Historically Low Interest Rates Help Push Chinese Equities Higher
Indeed, rate cuts have been constructive for not only Indian equities but also the Chinese market. As you can see below, easing cycles have historically coincided with strong market rallies in the MSCI China Index, a proxy for China H-shares, or stocks of Chinese companies listed on foreign exchanges. H-shares are one of the principal ways our China Region Fund (USCOX) has participated in the current bull market.
After three cuts in the most recent easing cycle, Chinese rates now stand at their lowest point ever, helping the index move higher in its quest to regain its November 2007 highs.
H-Shares Half as Cheap as Chinese Domestic Equities
Judging from the rally in H-shares, some investors might be concerned that the market is too expensive right now. On the contrary, H-shares, expressed below by the Hang Seng Index, are trading at a much cheaper multiple of 8.9 times estimated earnings to A-shares’ 17.4, a discount of 48 percent.
When we compare this trading cycle with the previous major rally that occurred from June 2005 to October 2007, we see that the run-up has plenty of room to climb higher.
Like Indian equities, Chinese equities are attracting massive amounts of fund inflows. For the week ending May 27, global investors reallocated $4.6 billion to A-shares ahead of FTSE indexing.
Last Thursday, the Shanghai Composite Index fell 6.5 percent, probably due to profit-taking. This represented the most significant correction since January, when the Chinese government curbed margin lending. It’s important for investors to look beyond the short-term noise and recognize that any correction this cycle could be seen as an opportunity to accumulate.