Commonwealth Games vs. Asian Games: China Beats India

India has been one of the most exciting stories among emerging markets in general and Asia in particular. Much of the country’s growth stems from burgeoning domestic demand, which represents about 55 percent of its economy.

But because India accounts for just 2 percent of global GDP and just 1 percent of world trade, its equities don’t appear on most investors’ maps; even though interest in the nation’s growth story has picked up since 2004, many will miss out on these compelling opportunities.

Yiannis Mostrous – Silk Road Investor

In June 2009, Yiannis Mostrous, editor of the Silk Road Investor emerging markets investment service, wrote the analysis quoted above about India. This is nothing new; Yiannis has been bullish on India for a long time. In fact, back in the fall of 2007 when most analysts were making goo-goo eyes only at China in anticipation of the Beijing Olympics the following year, Yiannis took a contrarian stance and ranked India above China in terms of where subscribers should invest new money. He was concerned that China was overheating and could be ready for a cyclical downturn whereas India promised steadier growth:

Although India has never exhibited the same growth characteristics as the rest of Asia and can’t match China‘s reported growth rates, it has largely avoided the boom-and-bust cycles that afflict the region’s developing economies.

India Outperforms

I’m always amazed at Yiannis’ ability to time markets and this example proved to be no exception:

Source: Bloomberg

A Tale of Two Cities

Over the past three years, the Indian stock market has outperformed the Chinese stock market by a whopping 75 percentage points! Amazing.

But the relative fortunes of these two emerging market giants may be ready to reverse. China is now cheaper than India on both a price-to-earnings and dividend yield basis:

Source: Bloomberg

And Charlie Munger, Warren Buffett’s 86-year-old Vice Chairman at Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), stated at Berkshire’s annual meeting in May that he liked China more than India right now:

China will grow faster because the Chinese government can get more done, while in India the government has created “paralysis.”

Warren Buffett chimed in, however, that “we kind of admire the democracy that causes the paralysis.”

The Buffett-Munger repartee pretty much sums up my feelings about India. Long term, India’s democracy will create open markets and encourage innovation that will produce the strongest economic growth in Asia. But in the short term, the authoritarianism and singular focus of China’s Communist Party will get more done than India’s corrupt democracy and will propel China into the economic lead.

Nowhere is the difference in Chinese and Indian business practices more evident than in the way the two countries are currently preparing to host athletic events.

A Chinese Paradise

First up is China’s management of the 16th Asian Games, scheduled to take place in Guangzhou, China from November 12^th to the 27^th. Forty-five Asian countries participate in the Games every four years, which have been around since 1951. China completed its work ahead of schedule and has turned over the facilities to the local organizing committee. Reviews of the facilities have been uniformly positive, with some saying that the athletic village is even of higher quality than was available during the 2008 Beijing Olympics.  The village is 63% covered in greenery including tropical trees and fruit plants.

A Nightmare in New Delhi

Compare this Chinese utopia with this Indian nightmare. India is hosting the 19^th Commonwealth Games in the capital city of New Delhi from October 3^rd through the 14^th. The 53 countries comprising the former British Empire have gotten together every four years since 1930. Seventy-one teams compete, which might seem strange given that there are only 53 countries, but some commonwealth countries (United Kingdom, Australia, New Zealand) send more than one team.  Anyway, the athletic village is a disaster.  The Scottish team has publicly called it “unsafe and unfit for human habitation.” Other country teams have used general adjectives like “filthy” and “disgusting” and England’s team said there was “unsafe electrical equipment, plumbing issues, doors not fitting properly and mud everywhere.” Puddles of muddy water contain mosquitoes that have already spread dengue fever throughout New Delhi and two Taiwanese tourists were shot by militant Muslims on motorcycles opposed to the Games.  All this with athletes scheduled to start arriving in the village in less than two days!

If this weren’t bad enough, other facilities are unsafe. A suspension footbridge leading to the main Jawaharlal Nehru stadium collapsed yesterday (Sep. 21^st), as did part of the stadium ceiling itself. Several high-profile athletes have withdrawn from the competition due to safety concerns, including the fastest man alive, Usain Bolt of Jamaica.

Lastly, allegations of corruption are swirling around the Commonwealth Games. The cost for putting on the Games have ballooned to $6 billion and are running more than 10 times higher than original estimates, and many government officials are wondering where all the money went.

China is the Better Investment Right Now

Bottom line, India’s infrastructure is not ready for prime time whereas China’s most definitely is. I checked Yiannis’ most recent “Fresh Money” buy list in Silk Road Investor and was not surprised to see that he now rates China higher than India.  Still, if I were to invest in India, it seems that infrastructure is the way to go since India’s population keeps growing and India’s network of roads, rail, power, and water ports needs to keep pace. Goldman Sachs’ (NYSE: GS) analysts continue to predict huge growth ahead for India and the other BRIC emerging markets.

The best way to invest in India is to focus on Yiannis’ favorite Indian stocks in Silk Road Investor. But for those investors looking for an “easy button,” check out a new Emerging Global Shares India Infrastructure ETF (NYSE: INXX). It’s not easy to buy Indian stocks on the Bombay exchange, so for many investors a fund is the better bet. This India ETF is already up 11% in less than a month so it may be prudent to wait for a pullback before jumping onboard.