Oct. 29 – Michael Cembalest, chief investment officer at J.P. Morgan Private Banking, has placed his clients’ trust firmly on Indian equities and not Chinese.
In his well-read “Eye on the Market” newsletter, sent to the bank’s high net worth individuals, he noted that since China began its market reforms, India has in fact well outperformed China. So far this year, India’s equity market has provided investors with a return of 22 percent while Shenzhen, South China’s bourse in the booming city next to Hong Kong, has actually shrunk by 3 percent.
Over the past 10 years, as we reported last week, India’s Mumbai Sensex has risen 545.2 percent compared to a rise of just 151.3 percent on China’s Shanghai Composite.
Of the 13 managers on Cembalest’s platform who invest in emerging or Asian equities, 10 are overweight on India, a winning strategy this year, he says, given India’s out performance versus most developed and developing equity markets.
In his newsletter this week, Cembalest outlines the reasons:
India provides better corporate profitability
Profit margins compare favorably with other developed and developing countries. Companies in India are more exposed to market forces than in China, which may explain the superior margin results.
India’s equity capital markets are more developed than China
India ranks in the top 10 globally in terms of equity market issuance, with three times the number of public companies as in China. There is greater exposure to the private sector as 75 percent of the investable market cap in India is made up of privately run companies, compared to 18 percent in China.
In short, Cembalest is saying that Chinese companies are “protected by the state” and that the implied lack of market forces create a situation where both state interference and a lack of competition are in fact making Chinese companies less profitable and entrepreneurial than Indian ones.
There is also a difference in funding – 90 percent of available bank funding in China goes to state-owned enterprises, while in India that 90 percent goes to privately held businesses. It makes it far harder for Chinese companies to compete at an executive level with their Indian counterparts, even with the benefit of state funding and involvement. Simply put, Indian businessmen are more capable than Chinese businessmen in making money, and being able to share that through dividends.
While it remains harder to operate in India than China at present, the country is very much on an upward trajectory, and the results speak for themselves. China’s massive state involvement in its own stock markets is hindering the development and profitability of their businesses. When India really starts to kick in with its tax reforms next year, the gap between Indian profitability and China’s in their respective stock market performances and funds may grow even wider.
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