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Emerging Market Investing: India vs. China

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What You Need to Know

  • In the past decade, the MSCI China Index had annualized gross returns of 7.8% compared with MSCI India's 3.4% — both below the MSCI All World Country Index's 9.7%.
  • Regarding prospective stock market returns, India’s low starting point relative to China may give it an advantage.
  • As for e-commerce penetration, it's reached about 25% of retail sales in China, above that of the U.S., but is under 7% in India.

By any measure, China and India have been economic success stories over the last decade. From 2008 to 2018, for instance, China’s per capita GDP roughly tripled, while India’s per capita GDP roughly doubled, according to the most recent data from the World Bank. 

In contrast, many Western economies, including Canada, France, Germany and the U.K., experienced no growth in per capita GDP and consequently in the average person’s standard of living during the same period. Interestingly, stock market returns didn’t necessarily match emerging markets’ lofty GDP growth rates. 

In the 10 years ended Dec. 31, 2020, the MSCI China Index (as measured in U.S. dollars) produced an annualized gross return of 7.8% while the MSCI India (USD) produced an annualized return of 3.4% both well below the MSCI All World Country Index (USD) gross return of 9.7%. 

Yet we see a compelling case as to why the future may look very different from the past and why India may materially outperform China over the next decade.

(In the interest of full disclosure, NextFins — the firm that I co-founded — operates a fund that tracks the Nifty Financial Services 25/50 Index, which tracks the top 20 financial services companies in India.)

People, Policies & Technology

A major factor in projecting the long-term growth of any economy is demographics. India has a young population, with about 40% of its citizens under 25 years old. 

This means that India could be adding to both its labor pool as well as to its overall consumer demand for goods and services for decades to come. 

India’s young demographic may also mean that relatively fewer funds will be required to support retirement costs for older generations, which may lead to the government being able to spend more on infrastructure and education.

A JPMorgan research report from January 2021 estimates that India’s dependency ratio (which is the ratio of the population ages 0-14 and 65 and up as a share of the total population) will not start to increase until at least 2044. In contrast, China’s dependency ratio started increasing at the end of the last decade and is projected to continue increasing for the next fifty years. 

The next important determinant of durable growth is whether India’s government can create policies that create jobs for its growing workforce. 

Over the last two years, India has introduced a series of pro-growth reforms. Specifically, in October 2019, India cut the corporate tax rate from 30% to 22% and introduced an even lower 15% tax rate for companies setting up new manufacturing facilities. 

In 2020, India introduced an incentive program that provides up to 6% back on incremental sales of electronics, auto components, pharmaceutical drugs and electric vehicle batteries that are manufactured in India. 

Government policy is also relevant with respect to the large publicly traded companies that are available for global investors. The four largest components of the MSCI China Index (in order of weight) are Alibaba, Tencent, Meituan and JD.com.

All four of these companies participate in the internet economy in one way or another, so a view of China’s regulation of internet services is highly relevant to the performance of these stocks and hence the performance of a foreign investor’s exposure to China.

With respect to India, the four largest components of the MSCI India Index are Reliance, HDFC, Infosys and ICICI Bank. 

Given the diversification provided by the Indian index in terms of industries (industrial/telecom, mortgage finance, technology and banking with respect to the top four components), government policy towards a specific sector is somewhat less of a risk.

In terms of prospective stock market returns, India’s low starting point relative to China may give it an advantage. 

According to data from China’s National Bureau of Statistics, e-commerce penetration has already reached approximately 25% of retail sales as of the first half of 2020 (higher than in the U,S). In comparison, e-commerce penetration in India is estimated to be less than 7%, says data provider Statista. 

Financial services is an area where India has a particularly large growth potential. For example, according to the research from the investment firm CLSA, India’s mortgage loan to GDP ratio is half that of China’s, and India’s debit/credit card penetration is a tenth of China’s, JPMorgan states.

The smartphone revolution also is allowing India’s growing middle class to leapfrog older technologies and jump directly into the digital era. India already has the lowest data costs in the world and partly as a result, the highest per-capita data consumption in the world. 

Smartphone penetration is currently 25% (well below China’s 56%). But as cheaper handsets become available, India may see accelerated growth and close the gap with China on a variety of metrics such as online retail and credit card penetration. 

Financial Sector Differences

Some of the financial companies that will contribute to, and benefit from, India’s growth over the next decade also happen to be large, professionally run companies that have a track record of compounding shareholder value over the long run. 

For example, the Nifty Financial Services 25/50 Index, which tracks the top 20 financial services companies in India, has compounded at an average annual rate of 18.8% since its inception in 2004.

These are also companies that, unlike their counterparts in China, are not mainly state owned enterprises (SOEs), a key point of differentiation and a factor that should allow for the continuation of the innovative programs and solutions many of these Indian institutions have been bringing to market in recent years. 

While it is impossible to predict the future, we believe the factors that have led to the outperformance of India’s financial companies over the last decade may continue over the next decade as government policy and increasing smartphone penetration could lead to faster GDP growth and higher productivity. 

(Photo: Adobe Stock)


Amit Anand is the co-founder of NextFins, which operates a fund based on the Nifty Financial Services 25/50 Index and believes in democratizing access to powerful investment themes through ETFs.