India’s economic growth will exceed China’s between 2016 and 2017, Threadneedle’s head of Asian equity has said.
Citywire A-rated Vanessa Donegan said the two countries are experiencing divergent growth trajectories and India will overcome China if its much-discussed reforms come to pass.
‘China is in a structural slowdown due to its economic model shift. Public investments are decreasing, and at the same time the government cannot command people to consume more,’ said Donegan at a roundtable event.
‘On the other hand, all the stars are aligned for a significant improvement in Indian economic growth, which we believe will exceed China’s between 2016 and 2017,’ she added.
Donegan said Chinese private sector debt looks stretched at the moment, whereas India's Prime Minister, Narendra Modi, is improving the condition for the private sector to invest and spend more in India.
‘Modi has been lucky for the oil price fall timing. The latest interest rate cut in India will be beneficial for consumers and corporates, while the rupee has remained pretty stable’ she said.
Closing in on China
She added that India’s share of manufacturing in GDP has scope to rise and get closer to China’s. ‘Currently, manufacturing makes up 18% of Indian GDP. Modi wants to raise it to 25% by 2020, with the aim to create 100 million jobs in the next decade.’
Donegan said growth will also be generated by some government-led businesses and social initiatives, such as the improvement of basic hygiene practices and the promotion of domestic manufacturing production.
‘The government is also working to provide a universal banking access and establish broadband connection to all villages by 2018,’ she said.
On the other hand, she argued the byzantine bureaucracy and the lack of a political majority in the Upper House might represent major setbacks in the reform process. ‘The direction of travel is clear, but we expect bumps along the way.’
Asked to outline which sectors she prefers in India across the several Asian equity funds she oversees, Donegan named banks, industrials, consumers and pharmaceuticals.
‘Banks will benefit from a stronger economy, while industrials are gaining from a pick-up in investment demand,’ she said. ‘Consumer discretionary and staples companies tap into the rising consumption story, while IT and pharma firms will gain share in export markets,’ she added.
Despite her stance on longer-term growth, Donegan has maintained a slightly overweight position to China, as she sees the country as a buying opportunity.
‘We can still find very good companies in China. The latest rate cut there [at the end of February] is helping the market, while some of the economy’s risks have been priced-in in stock valuations,’ she said.
Over the past three years to February 2015, the Threadneedle Asian Equity fund, which Donegan co-manages with George Gosden, returned 20.38% in USD terms. This is while its Citywire benchmark, the FTSE World Asia Pacific ex Japan, rose 14.95%.