How much of a superannuation fund portfolio do 2.5 billion people demand? This is the question that all superannuation trustees and their advisers should be addressing.
The question is particularly timely, as the world's two "billion-plus" populations, India and China, lead the world out of the global economic malaise.
I think it is time for Australian superannuation fund decision-makers to acknowledge that these countries are different and now deserve their own investment allocation, to forget the convenient BRIC (Brazil, Russia, India China) acronym and consider these markets on their own terms.
Superannuation funds may wish to consider a direct allocation to India and China of approximately 5 to 8 per cent of their portfolios separate from other emerging markets funds. And those in doubt may wish to consider the following five reasons:
1. High domestic consumption: Weight of numbers is a key attraction to China and India - a combined population of more than 2.5 billion people, and growing, has translated into strong domestic consumption that provides some insulation from wider global events. The growth in middle-income consumers in these markets is happening now and will equate to hundreds of millions of people over the next two decades, according to the World Bank.
According to the McKinsey Global Institute, India has the highest domestic consumption in the Asia-Pacific region, accounting for 57 per cent of the region's gross domestic product (GDP). India has always been a standout based on domestic consumption - it drives the economy and has helped it through the global financial crisis (GFC). Culturally, India is incredibly aspirational and entrepreneurial, two characteristics that will serve it well.
China's domestic consumption also generates impressive numbers at 37 per cent of a much higher GDP, according to McKinsey. China is experiencing increased consumer demand, with retail sales rising approximately 14 to 15 per cent a year and domestic consumption expected to eventually be one of its key economic drivers.
2. High GDP growth: China and India are the two fastest-growing major economies in the world. GDP growth forecasts have been revised upwards following a stronger-than-expected recovery in both economies and a favourable result in India's recent elections.
High growth rates have been a perennial feature of the last 10 years and are expected to continue. China is on track to overtake the United States as the world's largest economy some time in the 2020s. India is already the third-largest economy in Asia.
3. Low correlation to the US and developed economies: While major global financial events such as the GFC can affect all stockmarkets, China and India have shown a low correlation with the US and other developed markets during the recovery.
Investment returns from India and China have shown that these markets can perform strongly while much of the world struggles. Such diversification benefits will remain an attraction to these markets.
4. Access to some of the world's biggest companies: Without a direct exposure to China and India, investors may be missing the full benefits of investing in some of the world's biggest companies.
There are several companies located in China and India with higher revenues than Australia's BHP. Exposure to these Asian blue chips will be important for performance and diversification for Australian investors.
Indian powerhouses include Reliance Industries, Indian Oil and Tata Steel. China is home to Sinopec (ranked at number nine in the Fortune Global 500 list of the world's largest companies), China National Petroleum and China Mobile Communications.
5. Intra-Asian trade: India is now China's largest trading partner, according to the Indian government, and these two nations are the key players in intra-Asian trade.
Trade between these countries is going to be huge but investors won't necessarily have the full benefit from that trade if they invest in China and India via an emerging markets or Asian fund. This is a key reason why China and India deserve their own allocation.
China and India both have long, interesting histories, a diverse and sometimes chaotic mix of ethnicity, language and religion. Both are growing strongly in terms of population, regional and economic power. Both account for more than one-third of the planet's entire population.
How can we possibly group them with anyone else?
