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Growth in India and China, and Market Capitalisations as a Long-Term Sense Check

  • Jul 2023
  • | Jonathan Asante
  • | Global Emerging Markets team

The EM team is often asked about investing in Chinese versus Indian equities.

Of all the world’s economies it is these two which will overtake US dominance due to the sheer size of their populations. Both countries are already in the top 5 measured by Gross Domestic Product. We try in the table below to shed a bit of light on how we believe this might happen in the next three decades, in particular focussing on growth in total consumer demand. The expansion of mass market spending is typically where we look to invest most for clients.

Some Growth Arithmetic

 

China

India

US

GDP $ trillion *

19

4

27

Yearly private Consumption $ trillion*

7

2

16

 

Time to today’s US consumption amount**

 

 

 

5% growth in USD

20 years

46 years

 

6% growth in USD

17 years

39 years

 

7% growth in USD

15 years

33 years

 

8% growth in USD

13 years

29 Years

 

9% growth in USD

12 years

26 years

 

10% growth in USD

10 years

24 years

 

 

Capital Spending $ trillion

7.6

1

5

*As at April 2023 data for GDP, as at YE 2021 for consumption data

**Chikara estimates

Although both India and China are indeed catching up with the US it is still a long game for most consumers there.  In the event Indian consumption grows at 9% a year in US dollar terms, it will still, on our calculations, take 26 years to reach the scale of US consumer demand now.  In China both the country’s demographics and debt levels suggest that consumption will need to rise by a more sedate 5% meaning it might still take 20 years for Chinese consumers to match the aggregate spending power of today’s US consumers.

The story for capital spending (building stuff) is quite different.  China’s economy is guided by 5-year plans where priorities are often achieved through significant state-directed infrastructure spending.  China’s economic demand is therefore dominated by capital spending to the extent that it already surpasses that of the US.  Industrial companies from the US to Europe to Japan appear to understand this and some, such as Donaldson, Littelfuse or Fanuc, have built significant businesses selling into China’s vast and ongoing infrastructure development.  That India is far behind both China and the US in terms of capital spending must provide grounds for optimism in the board rooms of many industrial companies across the world.

Company Valuations - Travelling or Arrived?

We do not believe the future is forecastable, preferring instead to spend our energy finding strong businesses governed in a way that means our clients will benefit from any unexpected growth that does happen and not suffer too greatly from the many unforeseen setbacks that will also occur.  Although we strongly believe finding the right companies is the most valuable part of what we will achieve for clients, we try hard to not over-pay for those companies knowing that both emerging equities and currencies can suffer from extreme despair as well as euphoria.

In trying to avoid overpaying for leading companies, it has sometimes proved helpful to make simple observations about the size of their market capitalisations relative to the size of the economy in which they operate.  In this case we have chosen to compare a small group of Chinese and Indian companies, to the most appropriate US counterparts that we can find.

Given the amount of time it will still take for both China and India consumer demand to catch up, are there some Chinese and Indian companies already pricing in arrival?  Are there others which may look expensive on today’s stock market ratings, but which have lots of potential for shareholder gains simply because they are still very small compared to where they might end up? The table below illustrates the point.

US Comparator

Business

Mkt Cap $ billion

China/India Leader

Mkt Cap $ billion

JP Morgan Chase

Financial Services

401.7

Ping An Insurance

120.4

JP Morgan Chase

Financial Services

401.7

HDFC Bank

110.6

Wells Fargo

Financial Services

153.7

Kotak Mahindra Bank

47.4

BlackRock

Financial Services

100.8

HDFC Life

15.2

Half of P&G market cap*

Consumer Staple

168.7

Marico

8.4

Half of P&G market cap*

Consumer Staple

168.7

Godrej Consumer

12.9

Half of P&G market cap*

Consumer Staple

168.7

Hindustan Lever

75.4

Budweiser (acquired 2008)**

Consumer Staple

52.0

United Breweries

4.6

Budweiser (acquired 2008)

Consumer Staple

52.0

CR Beer

20.7

A quarter of Colgate

Consumer Staple

15.5

Colgate India

5.2

McCormick & Co

Consumer Staple

22.9

Foshan Haitian

40.5

Sherwin Williams

Consumer

58.9

Asian Paints

36.4

IBM

Global IT Services

117.5

TCS

146.7

IBM

Global IT Services

117.5

Infosys

66.4

Door Dash

Internet Home Delivery

25.2

Zomato

6.7

Door Dash

Internet Home Delivery

25.2

Meituan

106.1

Quest Diagnostics

Medical Testing

15.0

Dr Lal's Pathlabs

2.0

Walgreens Boots Alliance

Pharmacy chain

25.0

Yifeng Pharmacy

5.0

Source Chikara using Cap IQ numbers as at 31 May 2023

* Illustrates the size of P&G’s sales in North America, which were approx. 49% of its market cap as at the end of 2022

**Budweiser (part of Anheuser -Busch, which was acquired in 2008 by Inbev).  

Observations

Despite long and uncertain journeys ahead, many Indian and Chinese companies in our sample (shown in red on the chart below) already have market capitalisations approaching those of similar US companies today which means that far from simply emerging, they could be said to have very firmly emerged already!  These will have to possess exceptional qualities to produce anywhere near acceptable returns for investors in the next two decades.  

Those exceptional qualities are usually even harder to find in banks given what we would say is a propensity for banking sectors to flirt with insolvency over approximate 25-year cycles.  From our sample of what we consider to be the best quality leading financial companies, in our view only HDFC Life in India offers an acceptable return in this idealised exercise.  That relies on it maintaining its dominant position and if it does so its market cap is still a fraction of a reasonable US comparator such as the American funds management giant, BlackRock.

Some consumer staples companies might still provide strong returns if they can evolve strong brand-building capabilities in the same way that Unilever subsidiary, Hindustan Lever so clearly has in India.  From here Hindustan Lever’s management will have to perform exceptionally strongly to produce acceptable capital gains in the long term.

Some Indian IT service companies have reached, or are nearing, the market capitalisations of their global competitors by winning directly against them all over the world and they should continue to do so given their cultural advantages. We believe that Chinese online seller Meituan clearly highlights that companies using technology to offer novel services might easily end up far bigger than their US counterparts if they succeed in offering new popular options for consumers.

Finally, the chart below summarises what sort of US dollar capital gains investors in these Chinese and Indian companies may achieve if their market caps converge to the size of US peers in the next 20 years (for China) and 26 years (for India). These are very far from forecasts; they are merely sense checks. We leave it for readers to decide what returns are appropriate for them.  Our minimum required total return is indicated by the blue dashed line.

Growth in India and China and Market Capitalisations as a Long Term Sense Check

Source: Chikara estimates using Cap IQ numbers as at 25 May 2023

Important Information

This document does not purport to provide investment advice and should not be relied on for the purposes of any investment decision. It is not an offer to sell or the solicitation of an offer to purchase shares. In particular this document is not intended for distribution in the United States or for the account of U.S. persons (as defined in Regulation S under the United States Securities Act of 1933, as amended (the Securities Act)) except to persons who are "accredited investors" (as defined in Rule 501(a) under the Securities Act).  Chikara Investments LLP (Chikara) is not registered with the United States Securities and Exchange Commission as an investment adviser.  This document and its contents are confidential and must not be copied or otherwise circulated to any other person. Certain assumptions may have been made in the calculations and analysis in this document which have resulted in returns detailed herein. This document is based upon information which Chikara Investments LLP (Chikara) considers reliable, but no representation is made that it is accurate or complete and nor should it be relied upon as such. All information and research material provided herein is subject to change and this document does not purport to provide a complete description of the funds, securities or other investments or markets referred to or the performance thereof. All expressions of opinion are subject to change without notice. This document is issued for the purposes of section21 of the Financial Services and Markets Act 2000 by Chikara Investments LLP (Chikara), 31-32 St. James’s Street, London SW1A 1HD, who are authorised and regulated by the Financial Conduct Authority.