Investing read....
Given their heft in the emerging markets
world, China and India are among the
countries I get asked most often about,
particularly when they show market distress
signals like economic slowing. This past week,
the Templeton emerging markets team and I
have been in China as part of a large research
trip, doing further analysis on the market and
key company prospects. I thought it would
present a good opportunity to share a few of
my answers to recent questions on both China
and India.
CHINA
Do you expect the Chinese economy to
slow down further?
The Chinese economy grew 7.5% year-over-
year in the second quarter of 2013, in line
with the government’s growth target for the
year. Although the Chinese economy may be
growing at a slightly slower pace than in the
first quarter, when GDP grew 7.7% year-over-
year, China’s GDP growth remains stronger
than in many other major markets, which we
believe could remain the case for some time.
Moreover, on a positive note, China has been
slowly becoming less dependent on exports and
adjusting its structure for more sustainable
growth.
There are a few reasons why my team and I
believe China has the potential to maintain
strong long-term economic growth. For
instance, as disposable income increases for
China’s middle class—many consumers in
China have been benefitting from annual
increases in wages of 20% or more—more
personal assets could be funneled into savings
and investments.
In addition, urbanization is continuing apace,
with the government devoting more resources
to infrastructure and subsidized housing as
well as extending social security, education and
health benefits to migrants who have moved to
cities.
Also, we anticipate the authorities will continue
to reposition the Chinese economy to depend
less on export and investment spending and
more on domestic demand. Efforts to tilt
activity away from low value-added and labor-
intensive industries and toward higher-
technology activities will likely continue as
wage levels move up and as the labor force in
China becomes ever more educated.
What are your views on the weakness of
the A-share (domestic) market in June?
A-shares are those of local Chinese companies
denominated in Renminbi, traded primarily
between local investors on the Shanghai or
Shenzhen stock exchanges. We suspect the
recent weakness in Chinese A-share prices is an
overreaction to recent events. Indications that
US quantitative easing might be scaled back
can be seen as a sign of growing confidence in
the sustainability of a US economic recovery,
which would be positive for Chinese exporters.
Moreover, Japan’s measures of monetary and
fiscal stimulus that are due to increase in
coming quarters could help offset any potential
tapering of US liquidity. Similarly, the People’s
Bank of China’s actions to influence interbank
rates, by curbing some excessive “shadow
banking” activities, could create healthier and
more sustainable financial markets. We have
already seen a rebound, with the A-share
markets on an upward trend since the end of
June through mid-September. [1]
In a market of China’s size, the story isn’t all
good or all bad, thus it would be wrong to
generalize the market. Over the long term, we
believe there should be a rising trend in the
outlook of the A-share market since China’s
economic growth rate currently remains high
and market reforms appear to be on the right
track. According to our analysis, equity
valuations overall are currently not much
above their 2008 lows, and we believe that
many of China’s A-shares are attractively
priced at the moment.
INDIA
The Rupee reached record lows in August,
making it one of the worst performing
global currencies so far this year. What is
your view on the weakness?
It is true that the Rupee has weakened
recently. Some of the weakness is symptomatic
of the country’s poor policy and investment
environment. If that is rectified, we believe the
Rupee can once again be more stable. The
weakness in the currency can be good for
certain investments. For example, the weak
Rupee is excellent for India’s outsourcing
industry that has its costs in Rupees and
income in US Dollars. So our interests in such
companies have risen.
There have been fears of a downgrade in
India’s credit ratings. What do you think
the chances are of that happening?
Rating agencies generally look at a country’s
current environment and could take action
based on that country’s current prospects. It is
for the government to make its case that the
economy’s long-term fundamentals are intact.
Do you expect inflationary pressures to
increase in India amidst slowing economic
growth, a depreciating currency, rising
interest rates and higher commodity
prices?
My team and I believe the government must
counter inflation by improving productivity.
That is an ongoing task. There is no reason a
country that makes some of the cheapest and
highest quality medicines and is the software
and services factory to the world should not
be able to manufacture goods at a competitive
cost.
What can the Indian government do to
tackle the depreciation in the Indian Rupee
this year, high fiscal and current account
deficits and slowing economic growth?
We believe it is most important for the Indian
government to do all it can to harness the
significant potential that India has. The fact
remains that India is a net exporter, barring
its energy requirements. We should not be too
concerned about the current account deficit
and we should avoid any knee-jerk reactions.
In our view, what needs to be done is to
ensure that the many Indian and multinational
companies that truly want to make investments
and make a difference to India make the right
level of investments. We believe the
government must slowly reduce the extent of
public sector involvement in the economy and
allow private enterprise to make investments.
This could lead to an increase in productivity.
then growth rates should improve and the
currency should likewise strengthen, in our
view. It is heartening to note that the
government is finally taking steps to liberalize
investments; however, that should not be done
just to increase inflows, but also to enhance
efficiency and productivity.
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