Financial advisors can't judge the stock market growth of the country by just looking at GDP numbers. The lack of a civil law infrastructure like the one in the United States is a problem, particularly when it comes to intellectual property rights and fraud.
Demographic information from the World Bank and the United Nations shows these countries also need more social and economic policy reforms. For example, life expectancy in India is just 64 years old. In China, it's 74. The mortality rate for children under 5 years old is 66 per 1,000 in China and 19 per 1,000 in India. The average number of years of schooling in India is 4.4 while it's 7.5 in China. Meanwhile, the World Health Organization reports that food safety is a serious problem.
"It's like the beginning of the U.S.'s industrial revolution and all the problems that came with it," says Kate Laskowitz-Weingart, a Purdue labor relations professor emeritus, who has taught at the University of Beijing.
The literature coming from Asia is very similar to American novels written by Upton Sinclair and Theodore Dreiser that focus on U.S. economic struggles at the beginning of the 20th century, published reports have indicated. Despite the challenges, investors expect rising wages, increased domestic demand and exports to accelerate business growth.
Gregg Wolper, an analyst with Morningstar Inc. in Chicago, says fund managers are finding good values in India's consumer goods, electric power and financial companies. "Many fund managers remain attracted to India," he says. "That is not surprising, given the country still has a rapid growth rate and is home to global leaders in fields such as outsourcing and steel." Portfolio managers with China holdings typically invest in financial, telecommunications and energy stocks because they are the most widely traded securities, he adds.
Rajiv Jain, manager of the Virtus Foreign Opportunities fund, has 24% of his assets in India, compared with 10% in China. "The problem is that good businesses are not listed in China," he says. "Listed companies are state-owned enterprises, and the price valuations are risky."
Government-controlled Chinese companies, he explains, are more interested in employment than in enhancing shareholder values. Jain says he invests in companies that have strong franchises and earnings growth of more than 20% annually. In India, he owns companies that don't face competition from the large foreign companies doing business in the region. That's put him into companies such as ITC Limited, which has 70% of the country's tobacco market; HDFC Bank, which has 20% of the country's private bank market share; and Bharat Heavy Electricals Limited, India's largest engineering and manufacturing company.
"India's growth is internally driven, so it is less dependent on demand from developed markets," he says. "India companies offer diversification that is unlike that offered by other countries."
Rusty Johnson, co-manager of the Harding Loevner Emerging Market Fund, agrees that there are more investment opportunities in India than China. Only about one-third of India's companies are government-controlled, while two-thirds of China's firms are. But China's financial markets are three times larger, broader and more liquid than India's.
"India has more potential than China because they are starting at a lower capital base," Johnson says. "India is growing its consumer businesses, auto and cement tonnage production and infrastructure spending. They are catching up with China. The income differential is high in China, but India is catching up."