Chindia: a better bet than BRIC for SA investors

The demand driven characteristics of Chinese and Indian equities make them a better investment prospect for South African investors than their resource based Brazilian and Russian counterparts, according to Jersey-based investment house Ashburton.

One of Ashburtons Asia Pacific specialists, Craig Farley, says, "the main reason for this is that investors in the JSE are already exposed to the opportunities and risks of a resource based economy. By investing in Brazil and Russia, they are simply increasing their exposure to economies, in many ways, similar to South Africa's.

Conversely, the Chinese and Indian ("Chindia") economies are driven by a combination of positive demographics and consumption growth, and offer a more attractive long-term investment opportunity that is both substantially different and complementary to that offered by the South African economy," he adds.

Chinese and Indian equities have continued in much the same manner as they finished in 2006, testing new highs as companies continue to deliver robust earnings and upbeat growth forecasts. The rally has been supported by currency appreciation and enormous liquidity flows from foreign and domestic money in search of performance.

This euphoria prompted moves by the authorities to dampen some of the speculative excesses through austerity measures, but the effects proved short-lived. Encouraged by US Treasury Secretary Paulsons visit and positive moves by the authorities to deregulate its capital markets, China has continued to lead both markets higher.

Therefore, whilst profit and margin rebound across all sectors in 2006 and strong first quarter macro data leave us as bullish on China as we have been at any time in the past three years, the exceptional performance of the market year-to-date suggests a correction is overdue.

Farley also remains cautious on India, evidenced by demanding valuations and concerns about peaking corporate profits, albeit from a high base. Inflation remains above the governments comfort zone, suggesting further government measures to cool the economy may be necessary.

"For this reason," he says, "Ashburton's Chindia Equity Fund continues to be underweighted in the short-term in respect of India, until there is sound evidence that Indian interest rates and inflation are peaking. The Fund nevertheless remains well diversified, with infrastructure, property, environmental and consumer-related stocks the preferred calls."

"As with all sound investment strategies," Farley says "the Chindia Equity Fund takes a long-term view. Short-term setbacks are generally viewed as buy-in opportunities. Underpinning this confidence is that by 2020, "Chindia" could account for over 10% global GDP; make up 40% of the world's population; account for 50% of the world's consumption of natural resources; have US$20 trillion in banking and financial assets; and be the world's largest exporter of manufactured goods and services."

"Chindia's demographic profile is becoming younger, more literate and more urban, leading to greater productivity, rising incomes and increasing demand for goods and services. This is being accelerated by widespread cultural change as individuals increasingly adopt Western-style consumerism."

The enormous market depth of the two countries encourages investment across a wide variety of sectors including property, retailing, financial services and environmental infrastructure, without liquidity constraints.

Ashburton's Chindia Equity Fund has registered 12% growth since its launch on 1 December last year. While the majority of the Fund is invested in Chinese and Indian companies, it also leverages off multinational companies operating outside those countries but who derive the majority of their earnings from interests within them.