Buy India, Sell China

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In a March 2010 report titled, “Buy Chaos, Sell Order” CLSA strategist Russell Napier makes the case that returns from Indian equities will surpass Chinese equities over the medium and long-term. He makes the argument that the Asian century will begin when Asian economies transition from Mercantilist models to more Western consumption driven models. This transition will most likely occur in India first before China for the following reasons:

  • India is much closer to a private sector financial system than China. China’s command driven banking sector has resulted in massive misallocation of capital which will eventually be rectified by market forces.
  • India is closer to a free floating market based exchange rate.
  • India is less reliant than China on foreign exports for GDP growth. Thus, the transition to a consumption-driven “developed” economy should be easier in India.
  • The public sector in China continues to “crowd out” the private sector for investment capital. The banking system is creating consumer credit as opposed to maintaining legacy state run enterprises.
  • If China continues to follow the mercantilist model it will suppress inflation, allowing India to grow faster.

Finally, Napier believes that India mirrors the chaotic democracy of 19th century America. At that time investors preferred the order and stability of the British empire. However, as we now know the British empire had reached its zenith and was already waning. I think a similar dynamic is playing out with India and China. In the sense that China’s command driven economy looks far superior in terms of order and infrastructure. But at the end of the day its returns that matter to investors. Even famous investors such as Jim Rogers and Michael Bolton have fallen prey to the potkemin villages of China. However, as a value investor I always look for the undervalued gem and due to its messy democracy Indian equities are getting overlooked. I agree with Russell Napier that long-term equity returns will be better in India and aims to be a site that helps investors to uncover investment ideas for Indian stocks based on traditional fundamental value based analysis.

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