Chinese public equity stock markets have apparently lost ~USD 1 trillion in market capitalization since October 2020 (~10% of its total market capitalization). We go back to October 2020 as that seems to be the point from where President Xi Jingping began his attack on the Chinese tech giants.
According to a recent story in the Economist, since November 2020, there have been more than 50 regulatory actions against scores of firms for a dizzying array of alleged offences, from antitrust abuses to data violations.
On October 24, 2020, Jack Ma in a speech, in prelude to Ant Financials IPO, cautioned against the ‘pawnshop mentality’ of bankers and called for a new financial and credit system. That seems to have rankled the powers that be and seems to have ignited a series of actions against the Chinese tech giants.
Ant Financial cancelled its IPO within a few days of that speech. Didi, the Uber of China, has had to delay its global IPO on security concerns from data collected on its app. Meituan, the Chinese food delivery giant, was fined for market abuse. Tencent’s stock price fell on a government report allegedly stating that ‘gaming was opium’. The most recent action of course was to deem all after school tuition to be a ‘non-profit’ activity leading to large crash in Chinese education stocks.
The India Investment Allocation Case in Charts
CCP vs Capitalism
Some say the writings were on the wall and point to a speech by Mr.Xi from last year, where he is claimed to have said, “China must accelerate construction of the digital economy, digital society and digital government.. At the same time, it must be recognized that the real economy is the foundation, and the various manufacturing industries cannot be abandoned.”
These actions against consumer and financial tech firms, they claim, is the desire of the Chinese communist party (CCP) to ensure that China priortises manufacturing, AI and robotics.
There are of course other viewpoints which suggests these steps are also a move towards breaking monopolies and regulating markets. This claim though seems hollow, when you see the command and control of many State owned Entities (SOE’s) in sectors like telecom, banking and energy.
Most would then see the Chinese crackdown as the interest of the CCP reigning over the interest of companies and free markets. The tech giants were seen to be growing stronger and posing a threat to the party’s political power. They had to be cut down to size and seems like Mr. Xi is willing to pay the price for it.
Investors should be worried
Ray Dalio, founder of the hedge fund Bridgewater Associates, wrote in his blog on investing in China, “Capitalists have to understand their subordinate places in the system or they will suffer the consequences of their mistakes.”
News reports suggests that investors, across asset managers, pension funds, investment bankers are rankled and are re-assessing their china positions.
Of course, they need to reassess. China has been the biggest recipient of global foreign direct investments (FDI), foreign portfolio investments (FPI) and inflows from private equity (PE) and venture capital (VC).
Chart 1 and 2: Global corporations and investors have poured out their love for China
Source: world bank, data from 1999-2019; data is only inflows and thus valued at cost
American investors have also had to deal with certain regulatory uncertainties with regards to their investments in Chinese companies. The US SEC warned on investments in Chinese IPOs. Over the last 2 years, there has been the ongoing issue of American investors having to liquidate shares of certain Chinese companies who do not confirm to US audit and disclosure rules. This current issue should make investors even more vary of making large Chinese investments.
Chart 3 (20 year data) and Chart 4 (2 year data): China spurts and stutters; India outperforms
Source: Refinitiv, Datastream, MSCI indices in USD terms, chart rebased to 100 at start of the period
For all the growth that China has reported and the global investor interest that it has attracted, the returns from Chinese public equities haven’t matched expectations.
India, a country with lower average GDP growth rate has managed to post better returns than China across time periods.
According to a recent Morgan Stanley research, they estimate foreigners own USD 4.6 trillion worth of Chinese stocks – USD 3.4 trillion in H-Shares, USD 582 billion in A-Shares and USD 562 billion in Chinese ADRs. American investors are estimated to own about USD 2.2 trillion of the USD 4.6 trillion.
These are staggering amounts and one should expect that a considerable proportion of the discretionary active equity investors would be reviewing their investments in China. Especially, in the light of the events over the last 5 years starting with the tariff war under Donald Trump, the origins and the fallout of the COVID pandemic and now these recent issues with arbitrary changes in the ‘rule of law’ destroying legitimate business models overnight.
American and global pension funds and asset managers who will make up a large proportion of that USD 4.6 trillion have to make tough decisions on balancing their fiduciary duty towards their clients and continuing their investments in China in an apparent mis-alignment of interests.
Even if say 10% of the existing Chinese public equity investments were to move away and look for alternate investment destinations, that would mean ~USD 400+ billion in capital. If we take a similar 10% move out for the private equity/venture capital investments, that would be another USD 300 - USD 400 billion. A flood of money is now potentially available for other emerging markets.
We have long argued that India deserves to have a higher and a dedicated allocation from foreign investors. Of the total global investable wealth of ~USD 270 trillion (assets of Pension funds, SWFs, Insurance firms, wealthy individuals), foreigners have invested less than USD 600 bn in Indian public equities. If we add private equity, real estate and infrastructure, the total investments may be around USD 1 trillion in value. This is yet less than 0.5% of a global investable portfolio.
Of course, despite being a USD 2.5 trillion economy and with a USD 3 trillion stock market capitalization, India has limitations to the amount of money it can absorb. However, we would appeal to foreign investors to look at a higher Indian allocation over the coming decade.
As the economy expands, companies, markets and business models will mature and increase India’s absorptive capacity. That India has received cumulatively more inflows in private equity over public equity, (although) mis-allocated in our opinion, however does indicate the appetite and scope of India’s public and private market growth.
Chart 5 and 6: Global Private Equity Flows have sought out China and India
Source: EY report on India Private Equity and Venture Capital Industry: some PE investments may have also been counted in FPI; Schroders private equity report on China
We at Quantum, have been saying for over 20 years that Indian public equity offers foreign investors a sensible means to allocate large capital over the long-term.
Indian public equity markets have grown at 2x the S&P 500 returns over the last 20 years. The Indian stock markets are reflective of the structure and the trend of the Indian economy. Both the demand for equities (from foreigners and locals) and the supply of equities (increasing free-float and more IPOs) will increase the depth and the breadth of the Indian public equity markets.
Table 1: A Sensible Q India allocation: Value’ Investing and ‘Values’ Investing
*For detailed description of Q India Responsible Returns Strategy and Q India Value Equity Strategy such as investment objective, assets allocation pattern, investment strategy and philosophy, associated risk factors and other details please refer to the Disclosure Document available at www.qasl.com.; Inception data of Quantum India ESG Equity Fund; QIESG Fund is a daily NAV fund launched in India and managed by Quantum AMC (a 100% subsidiary of Quantum Advisors) on July 12, 2019 for local Indian investors under the rigorous Indian mutual fund regulations following an identical portfolio process as that of the Q India Responsible Returns Strategy.
The success of a recent IPO of Zomato (the Meituan, Doordash of India) has raised hopes on the internet economy expanding the investment universe. Investment bankers, with their twitchy hands, have claimed that these internet unicorns of now and in future by themselves would create an investable universe worth USD 300-400 billion in market capitalization.
Of course, it is not just the internet and start-up economy. Over the last few years, we have seen large public listings of companies from the insurance (life and general), asset management, banking, financial services and intermediaries, retail, consumer sectors, REITs, infrastructure.
As the economy matures and expands, many more such diverse businesses will seek to be listed in the Indian public equity markets, expanding the investable universe.
The average Indian is also severely under-allocated to Indian Equities. Mr and Ms India, with an average age of 27, are just about warming up to the India growth and investment story. Of those who do have disposable income and savings, the average Indian has cumulatively invested more than 45% of their savings in Bank Deposits and government saving schemes, more than 30% in Insurance and Provident Funds and only ~5% in Equities and Mutual Funds.
The regulator, SEBI would do well in ensuring that companies meet their minimum public float and over-time increase the non-promoter shareholding to improve India’s public equity investable depth, liquidity, governance, and capacity. SEBI’s decision to also mandate Indian companies to increase their disclosures standards through the new Business Responsibility and Sustainability Report (BRSR) is a great step towards India conforming to global ESG standards.
India of course has its challenges. Although, India has continued its reform process over the last 40 years, the government and the bureaucracy yet holds on to many an umbilical cord. Despite, lot of changes in the tax system, the over-zealous tax man with a Tax to GDP target does spring up nasty surprises. India also has its own version of Enron, Yukos etc, and many glorified managements and business families who show utter disregard for minority shareholders.
However, India still offers a ‘rule of law’. The courts through slow and excruciating, have the transparency and the justice system to comfort investors. India also has a long history of capital markets which has got further reformed and developed over the years.
India, as the chart below shows continues to grow despite and in spite of the Indian state and the government. The below chart also shows the reason for the fascination that foreigners have had for China and rightly so.
However, as our recent piece, argues that both countries may well be on a similar journey, just on a different timescale. Indian trains may not move as quickly as Chinese ones, but they still get there in the end. Finally, it is not China or India but China and India. Both markets should be seen as standalone asset classes and in today’s times of trust deficit and alternate reality, both should be examined closely for the veracity of their governance and market credentials.
Chart 7: India v/s China or India & China or India over China?
Source: Worldbank, RBI and www.parliamentofindia.nic.in as of December 2020, * - coalition governments
For more information and if you wish to discuss the details in the article or if you wish to know more about our investment strategies, the investment philosophy and investment opportunities, please contact:
Arvind Chari – Arvind@Qasl.com
Arvind Chari is the Chief Investment Officer (CIO) at Quantum Advisors. Arvind’s vast experience in managing money for global investors and his interactions with leading institutions has exposed him to a world of knowledge. With over 18 years of experience in tracking domestic and global economy he is Quantum’s thought leader and is the author of this Q-India Insight edition.