Global investing:

Australian investors can share the rewards as consumers in China and India go on a spending spree

Mark Story China & India

It’s no secret that the rate of growth experienced by emerging economy powerhouses China and India is nowhere near where it was during the mid-noughties, when it nudged 15% and 10% respectively. However, at around 6.7% and 7.2% respectively forecast for 2017-18 – compared with the International Monetary Fund’s forecast of global GDP growth of 2.7% – China and India offer valuable exposure to one massive consumption frenzy as their middle-class ranks explode.

Buoyed by healthy economic data, especially around strong export and import numbers and a decision by the People’s Bank of China to inject 498 billion yuan ($93 billion) into the economy, there’s renewed investor sentiment for China stockmarkets, which ran out of steam after explosive performances in 2009 and then again in 2015.

And while the Reserve Bank of India has softened somewhat its hawkish view on economic growth, due to declining inflation and lower-than-expected economic growth, there’s still strong demand for consumer durable and pharmaceutical sector stocks, which has helped to propel India’s sharemarket forward.

What makes having exposure to China and India within your investment portfolio a compelling proposition are new forecasts by the Organisation for Economic Co-operation and Development that by 2030 they will collectively account for a whopping 39% (or $US25 trillion) of total global spending.

Here are some ways you can get a slice of the action.

ASX-listed stocks

There’s no shortage of stocks listed on the ASX with sizeable chunks of their earnings exposed to China, and this can be a less daunting way to benefit from the consumption-boom story without being a stock picker in China or India.

A growing number of ASX stocks are exposed to China, and success selling into this market can boost the share price. But as infant milk formula marketer Bellamy’s (ASX: BAL) recently demonstrated when it was plunged into turmoil by a surprise licence suspension by Chinese authorities, a company’s Chinese fortunes can unravel if regulations suddenly change or if key customers withdraw support.

Included among ASX-listed stocks with strong China upside are: Blackmores (BKL), a2 Milk (A2M), Freedom Foods (FNP), Australian Agricultural Company (AAC), Treasury Wine Estates (TWE), Tassal Group (TGR), ANZ Banking Group (ANZ) and Sunbridge Group (SBB).

Meanwhile, Australia recently made its first uranium shipment to India three years after the September 2014 supply agreement, and among stocks that could receive a kicker from the country’s growing energy demands include uranium producers and explorers such as Toro Energy (TOE), Energy Resources Australia (ERA) and Paladin Energy (PDN); and coalminers like New Hope (NHC), Whitehaven (WHC) and Yancoal (YAL).

Listed investment companies

If owning direct shares into these markets appears a little scary, there are many LICs that invest in China and India. While Platinum Asia Investments (PAI) has exposure to both countries, PM Capital Asian Opportunities (PAF) has both direct and indirect exposure to China.

Then there are Emerging Markets Masters Fund (EMF), Asian Masters Fund (AUF) and Ellerston Asian Investments (EAI), which all offer exposure to both China and India markets.

The recently listed India Fund (INF) also offers local investors exposure to equities listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Exchange-traded funds

Traded like any other listed stock, and offering easy access to a basket of top companies on key indices, ETFs let you buy or sell quickly and at low cost. They’re an

alternative way to get specific exposure to emerging markets within the international component of your portfolio without having to be a stock picker.

Because most aren’t actively managed, Jon Reilly, CIO with Implemented Portfolios, advises investors to tread carefully with ETFs, especially given that they can’t rely on professional managers to limit losses relative to the fund’s underlying benchmark index. “While they’re incredibly powerful, investors must understand that returns from ETFs reflect individual company performance, plus underlying currency risk,” says Reilly. “With most international ETFs quoted on the ASX being unhedged, it’s important to have a view on where the Australian dollar sits.”

While Hong Kong ETFs do provide exposure to China, Reilly favours those exposed to the top 50 A-class shares with a mainland focus listed on the Shanghai and Shenzhen stock exchanges.

While there are no pure ASX-listed India-focused ETFs, Reilly says investors can still get some exposure via iShares MSCI BRIC (IBK) (20.92% return over a year, 8.49%pa over three years), or iShares Global 100 (IOO) (16.83% and 12.52%).

However, investors wanting to invest in overseas-listed ETFs with an India geographic focus have no shortage of ETFs to choose from, with year-to-date returns from the 26 India-focused ETFs (based on Bloomberg data) averaging 27%.

Rather than just picking any India ETF, Reilly says investors have to decide which part of the market they want to be in. For example, the two best-performing India ETFs – Direxion Daily MSCI India Bull (INDL US) and VanEck Vectors India Small- Cap (SCIF US) – have delivered 95.17% and 44.2% respectively (year to date).

Direct shares offshore

Due to the regulatory uncertainty plaguing foreign companies exporting into China, plus unease with rules governing China exchanges, Andrew Macken, portfolio manager at Montgomery Global Investment Management, favours investing in “Chinese national champions” listed outside mainland China. “We favour quality native China businesses listed on foreign exchanges, like the NYSE, NASDAQ or HKSE, as opposed to those on the FTSE A50 Index,” he says. “There’s greater comfort knowing investors globally are looking at these foreign-listed local businesses that aren’t exposed to regulatory hurdles confronting foreign companies.”

Montgomery Global Investment Management is currently invested in global tech giants Alibaba (NYSE: BABA), Tencent (HK: 700), plus China Life (NYSE: LFC), the largest life insurer in China which is twothirds owned by the Ministry of Finance.

While Montgomery has no direct investments in India, it has leverage into this market via Alibaba and Tencent, which have significant equity stakes in companies such as Chinese mobile internet company UCWeb – where India accounts for around 20% of the monthly 80 million global user base of its flagship UC Browser – and growing Indian companies such as Micromap Electronic Systems.

Unit trusts

Morningstar data reveals a third of funds under management in Asian unit trusts are, on average, invested in China. Unsurprisingly, the sectors in which funds have higher weightings include technology and consumer cyclicals that directly benefit from the region’s consumption boom.

Top-performing managed funds over the year to June 30, 2017 with a strong China focus include the Schroder Asia Pacific Fund (30.62% total return over a year), Premium Asia (25.26%) and Fidelity China (25.77%). Meanwhile, funds with direct exposure to India include Fiducian India (23.8% one year, 25.9%pa five years) and Fidelity India (16.3% and 20.1%).