Expensive India, rebounding China: rethinking Asian equities

For the past few years, intra-Asian stock markets have had a clear winner. The Indian market has been an astonishing success story, with an annual return of over 20% for the past five years*. That’s enough to make even a Silicon Valley “tech bro” take notice.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Today, picking the winner in Asia is a trickier prospect. India had a brief but significant period of weakness at the start of this year as earnings slowed and there was a hiccup in consumer spending data. Equally, after a long and uncomfortable period in the doldrums, China is re-asserting itself, with stimulus packages, an improving economy, and a muscular response to Donald Trump’s tariffs. The Shanghai Composite index is up over 7% over the past 12 months**. What was once a no-brainer is now less clear.

Perhaps the first consideration when trying to decide between these two Asian behemoths is their vulnerability to tariffs. Here, China is clearly more in the White House’s firing line, though the recent trade deal will mitigate the impact to some extent. It is also more enmeshed in global supply chains, with many global companies outsourcing their manufacturing there. Sashi Reddy, manager on the Stewart Investors Asia Pacific Leaders fund, says India may prove less vulnerable: “India remains a domestically-driven growth story and, as such, is somewhat isolated from the tumult in the global economy.” Strike one for India.

Economic growth may be another factor in India’s favour. While both countries are growing fast, India still has the edge. The IMF forecasts 6.2% and 6.3% growth for India in 2025 and 2026, while forecasting just 4% growth for China in each year***. India also has far more capacity for growth. China’s GDP per capita is now around $13,500, while in India it is closer to $2,900****. This gives India an extraordinary runway of growth from here.

But China has a few things in its corner. Sashi points out that investors have responded warmly to the launch of China’s AI challenger DeepSeek as an “impressive demonstration of the progress the country is making in AI”. He adds that market-friendly rhetoric from the government in Beijing and hopes that the United States’ trade tariffs might not prove too onerous have also helped support the Chinese market in recent months.

China is notably leading the world in some key areas – robotics, for example, electric cars, batteries and drones. These are opportunities that it is difficult to find elsewhere, or at least to the same level of sophistication. Equally, while China may find its access to US markets restricted, it appears to have willing and ready buyers elsewhere in the world.

Sean Taylor, manager on the Matthews Pacific Tiger fund, says the stockpicking opportunities this brings is the really exciting factor for China: “How successfully China navigates this period will come down to its domestic economic policy and the structural reforms it is implementing. While we have to be cognisant of China’s moves to stimulate the economy, we believe the focus should be on the organic potential of Chinese companies. For example, we think the DeepSeek breakthrough was a key development for China’s economy, and there’s also progress in other areas like biotech, which is competitive with the US.

He points out that in recent years the earnings of Chinese companies have been robust; it has been global sentiment that has held the market back. “If broader growth begins to recover in China, we potentially see a big P/E (price-to-earnings) ratio moment, with upside pressure on valuations.”

This potential for a significant re-rating is notably absent in the Indian market, which is expensive on almost any measure – relative to emerging markets, relative to its own history and, definitely, relative to China. That said, it has been expensive for a long time so investors waiting for a cheaper entry point will have been disappointed. It may be a case of just holding your nose and diving in on the basis that its long-term growth outlook is assured.
In reality, the question is not India or China, but both. China brings technical prowess, cheap valuations, but some slightly uncomfortable geopolitical baggage. India brings fast growth, well-run companies, but high valuations and less innovation. Both countries are likely to play an increasingly important role on the world stage over the next decade and they merit a place in a portfolio.

Those investors looking to add exposure to India might consider the Chikara Indian Subcontinent fund, while those looking to add more China exposure, might consider the FSSA Greater China Growth fund.

*Source: index factsheet, 30 April 2025
**Source: Shanghai Composite Index, at 21 May 2025
***Source: IMF, April 2025
****Source: Statista, GDP per capita in US dollars, April 2025

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.