India and China: An emerging market dichotomy?

China has both the world’s second-largest level of gross domestic product and population. It has a broad range of companies, with many at the forefront of technology and in high-growth areas. It has particular strengths in, for example, green technology, technology hardware and consumer-facing businesses. While China’s GDP growth has tended to slow in recent years, it has come down from a relatively high base and it still expands faster than many EMs and most developed markets. Investors are also attracted to its rising level of consumer spending power, particularly among the middle class, while urbanisation and modernisation have led to huge levels of infrastructure development. And because it is a market with high levels of government control, society can be strategically directed to meet goals such as growth or innovation, should it wish.

Government oversight can also be a major disadvantage, as political interference often worries investors because it brings uncertainty and can hit share prices. For example, when the government curtailed the operations of technology and entertainment conglomerate Tencent, initially in 2021, as it looked to limit the dominance of internet-focused companies. China also has relatively high levels of geopolitical tension, including with the US over trade and the status of Taiwan. It is less transparent than other markets, particularly when it comes to company reporting and shareholder status. And as mentioned, there have been substantial debt difficulties in the real estate sector, including the collapse of property company Evergrande. China’s population has an aging profile with fewer young to support the economy’s growth in years to come. China’s inclusion in EM indices tends to be curtailed to reflect issues like relatively low free-float levels as not all shares are owned by investors in the market, with substantial proportions held by the state. Higher levels of EM market inclusion help to improve market accessibility but could lead to index concentration issues.

India is the world’s fifth largest economy and has the largest population. Its GDP growth outstrips China’s and any other major economy. While its population is vast and increasingly urban, it is also demographically young, which means its base of workers, entrepreneurs and their ability to support consumption as well as those less able in society puts it at an advantage over many other economies, including China’s. It has seen some important reforms in recent years in finance, tax, including its goods and services tax, and the reduction of bureaucracy to help improve productivity and draw investment to the country. It also has a strong technology focus in its economy, particularly in IT services, while automobiles and pharmaceuticals are among its other industrial strengths. Its markets are also considered to have relatively robust and transparent markets compared with other EMs.

It is relatively reliant on energy from abroad. Its purchasing of Russian oil despite US disapproval, has led to some issues. It has often traded at less-attractive valuations because of its high growth potential and investor interest. India has some state and family corporate ownership, but its free-float levels are high relative to China.