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China India Russia How can I access these markets?
Since the turn of the millennium, the economies of China, India and Russia have all experienced strong economic growth leading one commentator to describe them as “high-risk, high-octane stuff” (Source: MoneyWeek, December 2006). For investors with an appetite for risk and the ability to ride out short term fluctuations in equity markets, these regions potentially offer very attractive prospects for capital growth in the foreseeable future.
Since the turn of the millennium, the economies of China, India and Russia have all experienced strong economic growth leading one commentator to describe them as “high-risk, high-octane stuff” (Source: MoneyWeek, December 2006). For investors with an appetite for risk and the ability to ride out short term fluctuations in equity markets, these regions potentially offer very attractive prospects for capital growth in the foreseeable future.
There is speculation that the G8 (Group of 8) countries will extend an invitation to China and India, along with Brazil, to join the ranks of the worlds most powerful nations in an expanded G11 forum. If so, they will follow in the footsteps of Russia who accepted an invitation to join what was then the G7 in June 2002.
The demographic argument in favour of China and India in particular is compelling as their populations and economies are predicted to continue to grow apace. China and India have a large base of well educated and increasingly urban young people supporting a small ageing population, whereas the reverse is true in Europe and the west.
The chart below illustrates anticipated population growth by 2050.
In historic terms it seems likely that China and India will dominate global economics for decades and centuries to come. Projections suggest that the Chinese and Indian economies will be second only to the US as soon as 2020. This may seem rather fanciful but it is exactly the situation that our forebears had in the 1820’s when the US economy accounted for less than 2% of global GDP.
Bull in a China Shop
Economic reform in China has helped deliver average GDP growth of more than 8.5% per annum since 2000 (source: United Nations) as historically one of the most economically introspective of nations has begun to trade more openly with the rest of the world.
China’s consumption of raw materials has already helped fuel a worldwide commodities boom having had an acute impact on the dynamics of supply and demand. A situation that many expect China’s growing population of increasingly sophisticated middle classes to repeat with mobile telephones, desktop computers and other consumer durables.
The statistic that best encapsulates the Chinese phenomenon, and reminds us that that the Peoples Republic is home to nearly twenty percent of the world’s population, is that China is spending $17.4 billion over the next four years to build 42 new airports (source: USA today).
This roaring economic dragon will be showcased to the world in 2008 when the summer Olympic Games visit Beijing. An event that the Chinese Government will be keen to ensure is well received.
At the time of writing Chinese investments markets appear very frothy indeed having risen sharply in the past 12 months and there is an expectation amongst many observers of an imminent market “correction”. When this occurs it will be interesting to see what effect it has on global investment markets which increasingly look to the east for their lead.
These fluctuations serve to reinforce that this is a market which is only beginning to open its doors to foreign investors. In the long term we believe that the fundamentals continue to support the outlook for capital growth and that we are at the beginning of a new era for global investing.
Indian Summer
India is the second most populated country and is highly literate with a large number of university graduates who, in a clear advantage over China, include a very high proportion of English speakers. This includes an abundant supply of high quality business people – there are 96,000 chartered accountants in India.
There are 30 MBA schools amongst the 220 universities and 10,500 colleges, which have seven million students. Quality IT personnel are plentiful and increasing, as more graduate each year from India’s 140 engineering colleges. (Source: Financial Director magazine)
Rukhshad Shroff, co-manager of the JP Morgan Asset Management Indian Investment Trust believes that the Indian tiger can continue to roar even taking into account strong performance in recent years:
“The Indian market contains a wide and diverse range of high quality companies from which to choose, spread across a selection of different sectors.
Compellingly, India’s economy is now being driven by domestic demand supported by rising incomes and structural agricultural reform, which means India is less exposed to any slowdown in global growth this year than many of it Asian neighbours. India’s longer-term fundamentals remain sound and compelling.”
Whilst major investment markets tend to move collectively, the Indian market has a historically low correlation with developed markets. We would expect this position to unwind as the market grows and attracts further inward investment but it is a situation which may prove an advantage in the meantime, especially if there is a general slowdown in established markets as many commentators believe.
Growing domestic demand for goods and services in both India and China is helping decouple their economies from an historical reliance on exports and economic well being in the west. With the strides taken in the service sector it can be said that India is some way ahead of the rest of the world on this curve.
Russia
"a riddle, wrapped in a mystery, inside an enigma"
Winston Churchill (1874 – 1965)
Speaking in 1939, Churchill’s quote might be an apt description of doing business in 21st century Russia. With enough oil and natural gas to power Western Europe for a hundred years, Russia has experienced a rapid metamorphosis from troubled economy of the late 1990’s to the darling of new Europe.
In Russia the rewards are high and the risks commensurate. Corruption remains a problem in almost every level of Russian administration and there is widespread organised crime, but these issues are being addressed and need not deter investors in credible collective investments with robust due process and corporate governance.
Russia has perhaps benefited most from the global geopolitical climate but its economic regeneration has not been based solely on strong oil prices. Like China and India, Russia has a rapidly expanding middle class who, perhaps more than any nation, have embraced consumer society with a seemingly rapacious appetite for luxury goods.
This provides opportunities for the canny investor in consumer staples such as financials and telecoms as well as food retailers, banks, mobile phone companies and breweries.
From a political perspective, Vladimir Putin is due to stand down in the near future but he will leave a legacy in a Stabilisation Fund of more than $100 billion of oil company revenues to underpin joint venture projects and infrastructure initiatives.
We expect GDP growth to continue at around 7.5% per annum in the next two years and in the short term Russia should continue to benefit from China’s appetite for natural resources. In the longer term, analysts at Neptune Investment Management believe that the outlook for Russia is very strong and that this will be balanced growth irrespective of the oil price, as the economy continues to move into being consumer and finance-led rather than resource-driven.
How can I access these markets?
There are a number of structured plans and collective investments which offer access to these markets and which are worthy of consideration. In the past couple of years, the acronym BRIC has entered the investment vernacular as funds have emerged targeting the economies of Brazil, Russia, India and China. We believe that these markets offer terrific opportunities for capital growth but would counsel caution as they can each present challenges not usually encountered in established economies. Because of the additional risks involved, exposure to these markets would normally only apply to a small proportion of an investment portfolio.
