A tale of two visits

Charles Stanley
John Redwood, Chairman of the Investment Committee at Pan Asset takes a look at the Indian and Chinese stock markets.

On the 20th October the President of China Xi Jinping will arrive in London for a state visit. The guest of the Queen, there will be a grand banquet at Buckingham Palace, and business meetings in Whitehall, Westminster and Downing Street. The aim will be to increase the volume of trade, investment and economic co-operation between the two countries.

China is looking for more knowledge partnerships with UK universities, more access to the London markets, and more joint action on liberalising the yuan. It wants to develop China’s Asian Infrastructure Investment Bank and participate in the UK’s new nuclear power programme.  The UK is looking for more market opportunities in China for a range of products and companies, for inward investment into UK infrastructure to boost growth and for City financial service expansion.

On November 12th, Indian Prime Minister Narendra Modi lands in London. The highlight of his visit will be an all-ticket Wembley Stadium event celebrating the best of the two nations’ cultures with the emphasis on the large Indian diaspora in the UK. Mr Modi will be accorded rock star status with a large audience for his speech.

The UK Indian relationship is a close and complex one, built in the last half century through the Commonwealth and in the shadow of empire. As Priti Patel, the Minister of state for employment and Ministerial organiser of the visit says, the aim is to put the “special relationship into the modern context in terms of supporting PM Modi’s vision of economic development”. The UK is likely to support Mr Modi’s wish to raise skill levels and invest in people, the Made in India campaign and the Modi reforms, will consider more technology sharing partnerships and encourage closer links between businesses and places in the UK and on the sub-continent.

These contrasts will encourage the media and commentators to look at the different paths to prosperity and growth chosen by China and India. Both countries aim for growth around 7%, fast by world standards. India has stolen the lead in the latest World Bank forecasts for growth this year, after a period of Chinese outperformance. Both countries have ambitious reform programmes. Both can create new jobs in the cities to attract people from less productive agricultural employment. Both are giants, with more than 1.2 billion people each. Both have been battling against corruption and inefficiencies in their bureaucracies.

In other ways they are very different. China has shown focus and dynamism in promoting exports, industry and investment to force the pace of growth. India as the world’s largest democracy has found such change more difficult to achieve, as it has been more understanding of property rights, individual freedoms and the right to object to change. It is now embarking on a programme to make more in India for the large and expanding consumer market.

Mr Modi’s bold reform programme has encountered political difficulties. His General Sales Tax to create a large internal market with common taxation has been stalled by Parliamentary opposition. His land reform proposal to allow easier acquisition of land for infrastructure is also delayed, and his labour reforms are being strongly resisted by some in the Union movement. As a result Mr Modi is now taking elections in Bihar state very seriously, as capturing more political agreement state by state will help him in the upper house of Parliament and help  in winning over more support generally for his reforms.

President Xi Jinping’s reform programme is even more ambitious than Mr Modi’s. It is international in scope, with his plans for One Belt, One Road linking China through the Middle East in an economic zone of new investment and development with the Chinese Infrastructure Bank at its heart. He wants a stronger domestic stock market, a more freely traded currency, membership of the select club of currencies used in the basket for Special Drawing Rights at the IMF, and a transition from reliance on exports and industry to more dependence on services and domestic consumption. The general transition of the economy to more service and consumption is happening, but there have been difficulties with currency and stock exchange reform. The President’s big battle is internal over corruption. Various senior official and business people are being investigated and prosecuted for past excesses.

Both stock markets have suffered in the summer sell off. Both countries despite their reform difficulties should grow well this year and next. Both governments want their economies to be more open to the rest of the world and more capable of sustaining successful profitable enterprises in the private sector. Both should participate in any rally, as growth in these vast countries is central to world economic achievement. The Hong Kong market looks very good value on around ten times earnings. India is considerably dearer at 23 times, and will need further advances in reform and earnings growth to justify these levels.

 


The above article by John Redwood, Charles Stanley’s Chief Global Strategist, was first published by Charles Stanley on 13th October 2016.