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Quality Is Becoming More Affordable in China, Less So In India

While challenges in China persist, Chinese companies look better than China’s economy.

Some key parts of the Chinese economy continue to stabilize. Manufacturing activities expanded in March for the first time in six months, led by new orders from domestic customers as well as by export orders. The government is pushing for more domestic production in strategic industries such as green technology and advanced manufacturing. Growth in services activities has remained good, with travel and tourism continuing to rebound. We are also seeing increasing localization as Chinese companies prefer Chinese suppliers over multinational corporations to de-risk their own supply chain. This is leading to domestic market-share gains for many companies. Finally, valuations for some high-quality companies look compelling at these levels.

Quality growth stocks in China have derated significantly since 2019 and are now trading at a nearly 40% discount to developed-market counterparts and emerging markets (EMs) as a whole. Conversely, while valuations of Indian companies have moderated slightly over the past year, they continue to be expensive relative to the rising valuations in developed markets. Quality growth stocks in India still trade at a significant premium to other EMs.

India’s evolving economy is promising, as witnessed by our analysts on a recent trip to the country; however, the stock market rally in response has probably gone too far, especially with regards to small and mid-cap stocks. Today, valuations remain stretched across most sectors.

Note: Top QG quadrant is defined as companies with a QR score > 0.5 and a GR score > 0.5. VR Score based on weighted average.

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How Persistent Are Quality and Growth?

At Harding Loevner, we are quality growth investors, which means we seek to invest in well-managed, financially sound businesses that can sustain profitable growth across economic cycles. But what do we mean when we talk about quality and growth as attributes of a company? While there is no standard definition of quality or growth in the investing world, our quality rankings consider factors such as the stability, level, and trend of a company’s profitability as well as its balance-sheet strength, and our growth rankings consider historical and estimated future changes in sales, earnings, and cash flows.

How companies perform on those measures can change over time. Industry dynamics evolve, which can lead to a shift in competitive positioning. Macroeconomic cycles and deviations in management strategy can also alter the long-term outlook. Even companies that consistently rank highly for quality and growth must be continuously assessed for signs of deterioration in their financial health, competitive advantages, and other factors. The challenge isn’t just determining the businesses that meet our criteria today, but also which businesses will sustain their quality and growth characteristics over the long run.

Chinese Companies Look Better than China’s Economy

In 2023, Chinese markets have been roiled by continued trade tensions, slowing economic growth, and deleveraging in the property sector. Despite this difficult backdrop, there are reasons to be optimistic about the growth prospects of some Chinese companies. Portfolio Managers Andrew West, CFA, and Lee Gao discuss their current perspectives on China with Portfolio Specialist Apurva Schwartz, including how they weigh the opportunities and risks of investing in the market.

Slowdown in Economic Growth

Real estate, the biggest source of wealth for Chinese consumers, was in bubble territory and has been slowing for a while. This has negatively affected consumer confidence and household consumption.

India: Four Takeaways from Our Travels

With high GDP growth and a rapidly expanding industrial base, there is a lot of optimism about the Indian economy. And having passed China earlier this year as the world’s most populous nation, there is the potential for a “demographic dividend” to bolster that growth in the coming decades. Recently, three Harding Loevner colleagues traveled to India to talk to companies and see conditions on the ground for themselves. In the video series below, portfolio manager and analyst Jafar Rizvi and analysts Sean Contant and Chris Nealand discuss what they saw on their trip and their perspectives on India with portfolio specialist Apurva Schwartz.