Identifying winners in the gems of China and India

THE meteoric rise of India and China is nothing short of a modern-day miracle. Within a mere 40 years after Deng Xiaoping’s economic reforms awakened the “Dragon of the East”, China has transformed from an agrarian society into an economic powerhouse.

India has similarly risen to global economic prominence in the past decade, driven by its wealth of resources and vast talent pool. According to the United Nations, India has overtaken China as the world’s most populous nation. This is the most significant change in global demographics since records began.

How will this impact the economic trajectory of these two Asian giants? My team and I took a deep dive, highlighting key demographic, economic and geopolitical drivers to identify winners within these markets. We term them the “Jewels of India and China”.

China growth story

While China’s manufacturing prowess and abundant labour supply have made it the world’s envy, it struggles with a dwindling pool of workers – a byproduct of its one-child policy. China can no longer rely on brute force to grow. Instead, it needs to lean on innovation to turbocharge productivity.

Supportive policies, emphasis on education, and adaptability put China in good stead. Its New Economy sector is testament to this, as is China’s strength in emerging fields such as artificial intelligence, quantum computing and biotechnology.

In addition to innovation, consumption is another key pillar of growth. From being the world’s factory, China is now swinging towards a more consumption-focused model. Rising income and affluence, coupled with new-age consumers who have no qualms about spending, have propelled China’s consumption engine to the next level.

These are the sectors in China that will continue to shine bright in the years to come:

1) Digital economy

China’s digital economy grew exponentially in the past three decades and has become arguably the most important economic force in the country. Case in point – China accounts for six out of the top 15 most popular social platforms in the world. At just over 1.3 billion monthly active users as at January 2023, WeChat ranks as the fifth most used social platform in the world, with TikTok and Douyin following closely behind at 1.1 billion and 700 million monthly active users, respectively.

The track record of the top five new economy platform companies (Alibaba, Tencent, Baidu, JD and NetEase) has also demonstrated revenue and earnings resilience in the past decade.

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2) Consumer discretionary

China’s consumer discretionary market is one of the world’s largest – with an estimated size of US$8.4 trillion in 2022, according to Oxford Economics. The market is highly diversified, made up of retail, e-commerce, leisure and entertainment. New methods of outreach, such as livestream channels hosted on platforms such as Douyin, have gained much traction. Interactive and accessible, these platforms have driven monumental sales for popular categories such as skincare and apparel.

China’s high-income consumers are a group to watch in this space, trading up to purchase higher-end products and brands that complement a more luxurious lifestyle in skincare, low-alcohol flavoured beverages, and more.

3) Banking

China’s banks are among the most well-capitalised in the world. In 2021, Chinese banks had a combined Tier 1 capital of US$3.38 trillion, more than double that of US banks. Additionally, Chinese banks have seen robust loan growth in the past decade, driven by strong economic growth and high rates of capital investment.

We favour China’s banking sector for the attractive dividends it pays. Looking at the Hang Seng Financial Index, which has China banks among its main constituents, we see that a large proportion of its total return over the past 12 years has come from dividends. The top six state-owned enterprise banks have averaged a very respectable dividend yield of 7.8 per cent over the same period.

India, the next gem

Unlike China’s shrinking (albeit slowly) population, India is enjoying a demographic windfall and has recently become the world’s most populous country. Its fast-growing and youthful population gives the country a massive working-age labour force – the backbone needed to support expansion of its resilient domestic consumption.

The following factors will also contribute to India’s long-term success:

• Thriving tech talent – India produces more than a million engineering graduates a year, cementing its place among the top sources of tech-related talent.
• Growing middle class – It is estimated that by 2030, nearly 80 per cent of India’s households will be middle income, up from about 50 per cent in 2019. This upward mobility will drive growth across all consumption categories.
• Offshoring powerhouse – India houses offshoring centres for half of the world’s top companies. Current labour market tightness, geopolitical tensions, and emergence of remote work will only serve to boost India’s place as the world’s back office. 

These are India’s sectoral jewels to look out for:

• IT services. India has multiple home-grown IT-services powerhouses, and will benefit as the global digital economy expands. A financial analysis we conducted of the top five IT services companies in India (Tata Consultancy Services, Infosys, Wipro, Tech Mahindra and HCL Technologies) found that the collective revenue of these companies grew nearly three times between 2010 and 2021. Net profits have followed a similar trend. The sector offers a million-strong workforce and has a robust capital structure. 
• Banking sector. India’s banking sector has grown substantially over the past decade. Strong economic growth has helped to grow middle-class wealth and income, which in turn led to rising consumption and demand for credit. Total banking assets grew from US$2.2 trillion in 2020 to US$2.7 trillion in 2022. We expect an increase in demand for both corporate and retail loans, especially in the areas of services, consumer durables, agriculture and real estate.
• Consumer staples. Demographic factors have been and will continue to be an important growth driver for India’s consumer staples sector. Fast moving consumer goods (FMCG) is the fourth-largest sector in India’s economy. Many global FMCG giants have set up locally-incorporated subsidiaries in India to tap the local market. The sector was worth about US$110 billion in 2020, and is set to double in size by 2025.
• Pharmaceuticals. According to projections by the Organisation for Economic Co-operation and Development, India’s pharmaceutical industry is expected to grow 232 per cent from 2017 to 2030, driven by tailwinds including rising incomes, improving healthcare infrastructure, and crucial government policies. India currently accounts for 20 per cent of global pharmaceutical exports and 30 per cent of the US’ generic drug imports. It is worth noting that India has the largest number of pharmaceutical units (over 200) located outside the US and approved by the US Food and Drug Administration.

The world is evidently shifting towards a multipolar order. India and China are poised to gain greater prominence in the decade ahead. We encourage investors to look into the sectoral opportunities to unearth the jewels in these markets.

The writer is chief investment officer, DBS Bank.