China is old news – here’s where to buy now
China’s time at the top is coming to an end – India is a much more appealing prospect. Lars Henriksson explains why, and picks the best way to play it.
Whenever I'm travelling around Southeast Asia whether it's to see companies or meet people in the financial industry it's highly likely that I'll meet a Chinese person living abroad.
Many are from well-to-do families, who dominate the business circles across the region. They are proud of their Chinese lineage and slip into Chinese dialects when they meet up leaving many Westerners unable to understand what they are talking about.
For their children however, it's a different story. Having grown up outside China, their grasp of the Chinese language is not as strong. Rather than let the language wither, many expat Chinese at least amongst my friends are happy to make up any kind of deficiency by sending their children to language tutors. They say it's an insurance policy in case China succeeds in becoming a dominant economic superpower.
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A lot of Western fund managers appear to be taking out similar policies. Many Asia ex-Japan funds have mandates to focus on Asian companies with a Chinese link.
Over the last decade, brokers have promoted this thesis under the slogan "Buy what China needs". And many people have made a lot of money from it.
But I believe China's time at the top is coming to an end, and I think I've identified the country that will be the next exciting prospect.
A country with a deep connection to Southeast Asia
The country in question is India.
There are millions of Indians making their home in Southeast Asia, with a concentration in Malaysia and Singapore. They are a mix of newcomers and those that have been living here for generations.
Before the Europeans turned up some 500 years ago, Southeast Asia was closely linked to India through trade, religion and geopolitics. The French scholar George Cds refers to parts of the region as "The Indianised states of Southeast Asia."
As a result, many indigenous cultures in the region have been heavily influenced by India. I first became aware of this strong influence while studying Thai at university. Most of the words in Thai are from Sanskrit, the bridge language of the Indian subcontinent (or Pali, through Buddhism).
Later, while living and working in Malaysia, I realised that a large chunk of Malay (Indonesia) words have a Sanskrit origin.
However, it is not just language where India's influence is felt.
When I married my Malaysian wife, she was dressed like a princess and the whole wedding ceremony including betel box, ceremonial thrones, henna-painted hands, gamelan music was 100% Indian.
Many customs and traditions across Southeast Asia also have Indian roots. A lot of royalties in the region can trace part of their family tree back to India.
What's more, Indians are flooding into Southeast Asia. In the second quarter of 2014, Indians were the third-largest buyers of private properties of non-Singaporeans, accounting for 11% (Malaysians and Mainland Chinese made up 30% each).
Very soon, I believe the tune could be shifting to "buy what India needs".
Why investing in India is more appealing than China
Over the last five, ten and 15 years, India has outshone China as a stockmarket. So even before considering whether Narendra Modi, India's new prime minister, will be successful in turning around the country, the odds favour India.
China is pushing India towards Southeast Asia. China's recent geopolitical and economic assertiveness is triggering a response from India. The game plan for China seems to be straightforward: extend their sphere of influence over the South China Sea. China has submarines based in Hainan appearing to prepare for a future where it controls its key maritime trade routes. However, India is not best pleased with this since a large part of the country's trade passes through the Indian Ocean. The safety and security of the sea lanes is indispensable for the country's territorial, economic and energy security. Given Asean's strategic geographic location, I expect India will be looking to play a part in the association's growth in order to protect its own interests.
India and Southeast Asia have already started building an alliance. In September, India signed a free trade agreement (FTA) in services and investments with the ten member countries of the Association of Southeast Asian Nations (Asean). It is hoped that this agreement will bring further movement of professionals and investments. The first point is important as Asean has a pretty competitive trade in goods, but is weaker in the service sector. India, with its many IT professionals, business consultants and academics, could fill some of that gap. The two parties concluded a FTA in goods in 2010. Trade between India and Asean was around $76bn in 2012-13, which is targeted to hit $100bn by 2015. By 2016, import tariffs will be lifted on more than 80% of traded products.
Here's how we can we play it.
A chance to buy India's Netflix
A number of companies are set to benefit over time.
I think one interesting way to access this opportunity is through Indian culture. Many people in Southeast Asia are quite fond of Indian music and films. And there are a lot of homesick Indians working across the region craving Indian content.
One of the biggest producers of this content is film company Eros International PLC (NYSE: EROS).
Listed in the US, Eros produces, acquires and distributes Indian-language films, commonly known as Bollywood movies'.
Whilst tapping into the buoyant Indian market, Eros is in the early stage of offering its film content globally. This is a video on demand service which can be streamed on smartphones, tablets and PCs. This service is priced the same as Netflix at $7.99 and £5.00. I think this could take off in Southeast Asia as well.
Tantalising prospects never come cheap though and Eros is no exception. The stock is trading on a price/earnings ratio of 20.3, according to Bloomberg.
But there's one very encouraging sign. Temasek Holdings, the major investment company owned by the government of Singapore, is the single biggest public shareholder with a 12.9% stake.
What does that tell us?
Well, Singapore (where the name itself is derived from Sanskrit words Simha lion' and pura town') has made a good living as a trading and service hub for the rest of Southeast Asia. If Singapore is excited about the Indian dream, then I think it's worth watching.
My colleague over at MoneyWeek magazine, Matthew Partridge, looks at some of the best ways to invest in India in the next issue, out on Friday. If you're not already a subscriber, get your first four issues free here.
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Lars is an emerging-markets expert, with many years of 'on the ground' experience hunting down profit opportunities in Asia. Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund. In short, Lars has real knowledge of where the opportunities in Asia are.