Why India deserves a higher PE ratio compared to China

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Many people have asked me why I was/am against India joining the race of a new BRICS currency. Actually, first it is not going to work for structural reasons like BRICS nations still export most of their products to US and US is their biggest trading partner. Then, China is a trade surplus country so it is very difficult to make Yuan as a currency because how they will meet the currency demand as for that they need to be in trade deficit (Like USA). Third, China's strict capital controls restricts the ability of yuan as an international currency because the exchange rate against other currencies won’t be free market driven. It will be very difficult to meet demand if they are trade surplus... although not impossible. 

Still, let’s assume that these are very small problems in front of this grand ambition and so China will be able to put these asides. But here the issue is why China wants this desperately? Reason- Taiwan. China knows that the moment China tries to invade Taiwan US will put sanctions and all its trade lines will be disrupted and economy is gone. Hence, for years Chinese thinktank is planning and looking for ways to counter any such action by US and its allies. For this, the major weapon China has is to make itself deeply rooted in global trade and increase the inter-dependency of US and European firms on China. In other ways, the idea is to make China so relevant and important to the economies of these nations that any sanction on China will also hit them hard. And promoting Yuan as a currency is one such move. If China is able to establish Yuan as a second biggest global currency due to massive trades of China with other nations, then in case of sanctions all those nations will also get hit severely and in that case Dollar will also not be able to escape that carnage. 

So, the plan is simple for China. And that’s why, why should India help China in its plan when a stronger and strategically important China is going to hit and invade India after that. That’s why I always believed that Indian government was never serious on a new BRICS currency. The all such actions of India were just to make USA to realize the importance of India since USA was trying to hit India with tariffs and all sorts of nonsense (there were some other reasons for that, will try to take those some other time). So, this was a game theory ploy to make USA aware of the huge costs of agonizing India. But, USA is also smart and we can understand that they were full aware of the vulnerabilities of India as a partner in new BRICS currency. That’s why the Tariff drama went on for such a long time and we can see given the massive importance and role of USA in global trade it is very difficult for Indian govt to stood firm for such a long time. Still, India did a great job in giving firm replies to US that India should not be treated as a subordinate. Just like US knows Indian vulnerabilities against China, India also knows that US also needs India to counter China. So, it is very easy to condemn government after listening to idiotic senseless content in media but the real-life geopolitics and survival in it is not easy. But I have my full trust in Indian government.

So, we can understand why there is a rush in US and Europe to present and establish India as an alternative to China supply chain. All the bonhomie we are seeing these days between Europe and India is also related to this one reason. So Global value chains will shift to India and other nations but India should be the one with biggest stake because we also represent biggest market for all these products proposed to be made in India. That’s why I am saying all the time that the time for stunning growth phase of India is coming now. Because of this growing importance of India as a counter to dangerous China is one reason I always feel Indian market deserves way high PE ratio as compared to China and I am always surprised why some Indian fund houses and analysts are comparing India with China and even concluding that Chinese market is cheap. Well, it is not and the kind of growth and international Importance India is enjoying right now and this will keep getting bigger, only means that India deserves way high PE ratio. For example, Just see the scenario in current war. When whole world is trembling with the prospectus of huge energy infra disruptions due to this war, Iran has allowed Indian ships to cross the strait of Hormuz. India is a friend of Israel still UAE president visits India for some urgent 2 hour visit. Russia is fighting with Europe and Ukraine but Europe is entering into huge trade deals with India and countries like France are even considering India as big defense partner. But still, India is importing Russian oil and Europe has no problem with it. So, looks like India is the only one who is playing this complex geopolitics game like a master. Presently, once safest place like Dubai is getting hit with missiles but amid all this uncertainty India is the one with most balanced international foreign policy and people should be able to see what real safety is- not money or defence but geopolitical equilibrium. If we consider the authoritarian government of China (not a democracy like India) it is very risky from policy point of view. Then China does not have control over its Sea routes like India has and this aspect can hit it hard in the Indian Ocean through which it imports most of its Oil/energy needs. So, India deserves a big re-rating in its PE ratio for being so relevant, important, balanced and safer.

Why China deserves lower PE ratio as compared to India 

a) Indian economy is on natural growth path and the chances of any structural and external risks are very less. India just needs to strong on policy front (and it is good they are doing that-recent GST cuts, PLI schemes etc). Even without that we are going to grow good. Our economy is not on steroids. It is just like when a young fellow or even a person in his late 30s (35-40) decides to go to GYM for building muscles. At first, his body will give very fast results- whatever he will eat, eggs, meat etc. will be converted into muscle faster…his strength will rise fast. Even the person in his late 30s will feel the same. Because the body is in natural growth phase. Let’s assume that our Gym guy is all natural as of now (no steroids, no supplements). He will hit bench press of 120-130 Kg…all natural.

But then after a long phase of growth the body will begin to show limitations…growth will be slower…there will be injuries. All this happens because of higher base effect, over-training of the body, nutritional deficiency etc. So, the guy will start taking steroids and supplements for faster recovery and faster absorption. And he will again witness faster growth. But that will also face the limits and body may show even more serious symptoms like kidney/liver problems due to over consumption of protein supplements and steroids. Hence, the phase after natural growth is very tricky one and needs to be handled with utmost care.

b) Same is true for economies- Indian economy is seeing natural growth because of increasing income levels leading to growth in demand and supply. Govt is investing big in Infrastructure…and India still lacks big time in infrastructure. Our per capital Income is still very low…so we don’t have good muscles now. Now, take an economy which has already seen huge growth and high per capita income. The sign of hitting the wall of natural growth is the decreasing return of new investments just like our bodies. Another sign is rising bad debt which is nothing but misallocation of resources which is also natural in large growing economies. 

So, countries like China have already created the necessary infrastructure and also created huge manufacturing capabilities. But to grow further they have started taking steroids- which are creating unnecessary ghost infrastructure, huge growth in real estate making it big chunk of total GDP, more debt to induce consumption. So, their economy is now on steroids and classical symptom is existence of bubble in ASSETS (real estate and Ghost Infra in case of China).

c) Another case of steroid is higher dependence on Export; that too based on lower cost. An export-based economy is very risky because of uncertainty of external factors. You are basically giving away your critical minerals/resources/food just to collect piece of papers (Dollars) which has created a problem for you (where to invest). So, over-reliance on exports is a very risky move because every country does try to be self-reliant. Further, if you are creating exports manufacturing capacity aggressively so as to hit the employment and production capacity of other economies then it is very dangerous because they will try to block you.

So, China has created this huge manufacturing capacity, gigantic scale. But now it has become a big problem for it. It can’t be used to absorb its production locally because production is way bigger than local demand. So, you are now trapped in the hands of others. We are seeing China selling High Tech EV cars for $1000o, it is selling these at losses. 

d) So if you ask me- Chinese economy is very risky and so it deserves lower PE ratio because it needs to handle the problem of steroids and growth after natural phase; that too amid high competition from other developed countries. India can grow good with its local demand because unlike China we have good local consumption while China is trying to grow local consumption with limited success (Because of structural reasons like real estate Bubble and excess manufacturing capacity).

e) If we consider the authoritarian government of China (not a democracy like India) it is very risky from policy point of view. Then China does not have control over its Sea routes like India has and this aspect can hit it hard in the Indian Ocean through which it imports most of its Oil/energy needs.

The way India is doing trade deals with all of the major economies also reflects the growing importance and high growth potential of Indian economy. So, I am surprised when I see our great analysts/FIIs trying to compare the lower PE of China because it actually deserves lower PE now. The factors deciding the riskiness of an economy are not your routine stock marker ones but they are of much bigger macro scale and more relevant than financial ratios/metrics.

(Disclaimer: The above study is purely an educational content and is only for learning purposes. The Writer is a SEBI Registered Investment advisor (SEBI IA registration Number INA000020244). The above study is based on personal opinions and analysis. Please do not consider this study as an investment advice and do your due diligence or consult a certified financial advisor before investing. The content writer shall not be held responsible for any profits or losses incurred as a result of investment decisions made by the readers based on the shared content).