How Indian Profitability Has Outperformed Chinas

Michael Cembalest, chief investment officer at J.P. Morgan Private Banking, has placed his clients trust firmly on Indian equities and not Chinese.In his well-read Eye on the Market newsletter, sent to the banks high net worth individuals, he noted that since China began its market reforms, India has in fact well outperformed China. So far this year, Indias equity market has provided investors with a return of 22 percent while Shenzhen, South Chinas bourse in the booming city next to Hong Kong, has actually shrunk by 3 percent.Over the past 10 years, as we reported last week, Indias Mumbai Sensex has risen 545.2 percent compared to a rise of just 151.3 percent on Chinas Shanghai Composite.Of the 13 managers on Cembalests platform who invest in emerging or Asian equities, 10 are overweight on India, a winning strategy this year, he says, given Indias out performance versus most developed and developing equity markets.In his newsletter this week, Cembalest outlines the reasons:India provides better corporate profitabilityProfit margins compare favorably with other developed and developing countries. Companies in India are more exposed to market forces than in China, which may explain the superior margin results.Indias equity capital markets are more developed than ChinaIndia ranks in the top 10 globally in terms of equity market issuance, with three times the number of public companies as in China. There is greater exposure to the private sector as 75 percent of the investable market cap in India is made up of privately run companies, compared to 18 percent in China.In Rosetta Stone V3 short, Cembalest is saying that Chinese companies are protected by the state and that the implied lack of market forces create a situation where both state interference and a lack of competition are in fact making Chinese companies less profitable and entrepreneurial than Indian ones.There is also a difference in funding 90 percent of available bank funding in China goes to state-owned enterprises, while in India that 90 percent goes to privately held businesses. It makes it far harder for Chinese companies to compete at an executive level with their Indian counterparts, even with the benefit of state funding and involvement. Simply put, Indian businessmen are more capable than Chinese businessmen in making money, and being able to share that through dividends.While it remains harder to operate in India than China at present, the country is very much on an upward trajectory, and the results speak for themselves. Chinas massive state involvement in its own stock markets is hindering the development and profitability of their businesses. When India really starts to kick in with its tax reforms next year, the gap between Indian profitability and Chinas in their respective stock market performances and funds may grow even wider.This article was written for which was established by Chris Devonshire-Ellis.