While the COVID-19 pandemic is still weighing on many economies around the world, policymakers in India and China – the world’s two largest markets by population – have executed key structural and policy reforms over the past year.
The two countries, each home to more than 1.3 billion* people, are focused on different and potentially complementary areas of growth: China on domestic consumption and technological innovation, India on expanded manufacturing capacity, which may put it in position to fill a global manufacturing gap as China moves up the value chain. Both are growing more focused on sustainable development.
For equity investors who embrace a bottom-up approach to security selection, we think this may spell opportunity. But first, let’s take a closer look at these two economies.
Slowing the spread of COVID-19 remains a challenge, though the country is making some progress with the third phase of vaccination – for people above 18 years of age – starting May 1, 2021.* We believe less stringent regional lockdowns, as opposed to harsher nationwide lockdowns, the gradual vaccination of working age citizens and a better prepared organized sector could limit the overall economic impact of the second wave. We believe that a recovery in corporate profits over the medium term is likely to remain intact
Planned structural reforms in labor law, agricultural production and the momentum building behind various production-linked incentives may help to drive growth in the medium term. Increased privatization in particular should boost fiscal resources, while we think new policies on national logistics, industrial production, e-commerce and retail trade could help shift India’s labor force away from low, unproductive agricultural activity toward more productive manufacturing and services activity.
China’s economy also held up well during the pandemic, and the recent “Two Sessions” devoted to the 14th Five-Year Plan provided welcome clarity on policymaking. The “dual-circulation” strategy that aims to reduce dependence on overseas markets should spur domestic consumption and self-reliance and encourage foreign inflows. That may speed R&D and investment and help China gradually shift from a basic industrialized economy to one driven by innovation.
Innovation will be especially important in helping China achieve its goal of carbon neutrality by 2060 (and a peak in CO2 emissions by 2030). With “carbonomics” becoming the country’s new yardstick for growth, this may come in the form of carbon trading and investments in alternative energy generation such as solar and wind power and electric vehicles.
China and India together are also home to nearly a third of the global Millennial generation, which we consider the most powerful consumer force in the world today. Despite distinctly different development cycles in the two countries, we expect Millennial consumers’ spending patterns, preferences and priorities to contribute to the transformation of the Chinese and Indian economies over the next decade.
One priority for many Millennials is sustainability, and we see a number of opportunities tied to the increased focus on environmental, social and governance (ESG) factors.
In China, ESG considerations are driving development of market mechanisms to price carbon and increased adoption of alternative and renewable energy sources. While the availability of ESG-related information disclosed by Chinese corporates may not be as plentiful as it is in developed-markets, the development of capital markets and greater institutional participation are pushing corporations towards greater transparency and more efficient resource allocation. We think technology can be used to drive economic efficiency and encourage industries and households to adopt alternative energies such as solar energy and electric vehicles.
India has set national objectives to achieve carbon neutrality by 2050, with 60% of installed power generation capacity to be based on clean energy by 2030. Efforts are also being taken to improve on ESG practices and related disclosures. Many companies are leading the ESG charge with public announcements on long-term net carbon goals.
Global financial institutions, pensions, endowments and other large investors today allocate less to emerging-market (EM) equities in general than they do to developed-market stocks. If EM corporate earnings growth momentum improves, we expect to see additional capital flow into the EM assets, particularly given today’s attractive valuations.
In China, the increased corporate leverage that helped trigger a market correction so far this year remains a risk to watch. But we think fundamentals remain strong and expect earnings growth—not sentiment—to drive markets from here. When it comes to potential geopolitical risk, we think investors should hope for the best but prepare for disruptions.
India’s economy appears to be on the mend. Real GDP is expected to bounce back over the next 12 months after an expected 7.5% contraction in the year through March. We think the medium-term earnings growth trajectory in India looks positive. A COVID-19 resurgence remains the most potent near-term risk, followed any loss of momentum on economic reforms.
* Source: Goldman Sachs Asset Management. Bloomberg.
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