Is China or India a bigger market risk?
Big, structural comparisons between the two countries are engaging. But theshort-term outlook is probably more important right now. Emerging markets areripe for a negative shock: optimism is widespread, global liquidity is tightening up,and both China and India are both headed for a slowdown.
We think investors should be more concerned about India
Inflation appears under control for now, and the RBI kept rates steady at its policymeeting on April 18. However, demand is outpacing supply and credit growth isextremely high. We see upside risks to interest rates and downside risks to capital nflows.
The balance-of-payments contrasts are especially stark
India runs a current account deficit, financed by short-term capital inflows. Chinaruns a current account surplus, and receives long-term capital inflows. India ismore vulnerable if the global environment heads south, especially if the RBI does not raise interest rates fast enough.
From the structural standpoint, India looks better
India’s consumption-driven growth model is healthier than China’s investmentdriven model. And the upside to India’s infrastructure program is probably greater. However, we expect financial markets to be driven by short-term trends rather than the long-term outlook.
Our views favor financial assets in China compared to India
We expect the Chinese yuan to appreciate against the rupee. Chinese stocks could outperform those in India, especially if there’s a global liquidity shock. However, neither country is one of our preferred equity markets.