Predictably, investment managers are using the Olympics to hype the funds they run investing in China. Forget it. It’ll be another ten years before it makes sense to think about investing there.
I’ve spoken to many investment managers who’ve told me horror stories about China. Like the one about the paper making company whose website said it was eco-friendly but which turned out to be poisoning its local river and drinking water supplies.
The whole political and economic system is corrupt, since it’s in theory all run by the Communist Party but groups of people within the Party, including the army, profiteer at the expense of the proletariat. You can’t trust what anyone says. Regulations exist on paper but are ignored except when officials want a shakedown. It’s worse than the Wild West in America in the 19th century, and investors who went in there lost all their money. In fact, America only became a safe place to invest after 1900 – before then the chances were that robber barons would stitch you up and take your money.
Disaster for investors
China today is going through the kind of boom the US experienced between 1850 and 1900, and it was a disaster for investors. The only difference with China is that the robber barons are, in theory, Communists. I can’t see that as an improvement.
I’m not saying there aren’t great investment opportunities in China. The economy is booming and that will continue. It’s just that most of the profits will be grabbed by insiders in a twisted version of crony capitalism called crony Communism. True, many of the funds investing in China actually invest predominantly in Western companies doing business with China. And that at least avoids most of the risks I’ve described. But it also dilutes the benefits, since for most of these Western firms, China is only part of their business.
Anyway, why invest in China when there is a better emerging market to invest in, and one that speaks English? Moreover, though India is quite corrupt, it is much less corrupt than China and at least has a functioning legal system that is independent of the government (not so in China), and ownership rights are secure.
Tap into the boom
India is going through the same kind of boom as China – millions of people are joining the urban middle class, the government has a huge $500 billion 5-year infrastructure spending plan, and there are zones where business is going gangbusters, like the IT sector in Bangalore.
India also has a genuine home-grown pharmaceutical industry, which started by making cheap clones of Western drugs but is now doing R&D for big Western firms. It has well-managed businesses in sectors such as steel, construction, entertainment (Bollywood is far bigger than Hollywood), beer, cars, appliances and many more.
There are several UK funds investing in India. One of the best is JPMorgan Indian Investment Trust, which has turned £1,000 into £2,880 over 3 years and £6,620 over 5 years. Manager Ted Pulling is confident about the market, even though it has fallen 20% this year, saying that company earnings are booming and that economic growth is set to sail along at between 7.5% and 9% a year for the next few years at least.
Fuel subsidies will help
Energy is a problem since India imports half of its energy and is running a trade deficit, but if it can cut fuel subsidies the problem will shrink rapidly. And, as is always the case in the world’s largest democracy, the political outlook is uncertain, with the next election likely to require a contentious deal between at least two rival parties to form a government.
But most observers say the momentum of development is now unstoppable and with half the population aged under 21 India is likely stay on a dynamic growth course for several decades.
Ignore the Olympic hype. China is a speculator’s market – the 50% decline in its domestic stock market over the past year has been as mad and frenzied as its previous ascent - while India offers genuine investment opportunities. For long-term investors prepared to accept the volatility that always accompanies ‘sex-and-violence’, India looks a good buy.
