To invest in India or China? Which to choose?

Both countries' stock markets show huge potential but there are many issues to weigh up before investing your money

China or India? it's not just the geopolitical question of our age but also a key choice for investors. On the one hand China has grown to such a size that it's probably a misnomer to call it emerging: it has already emerged, set to outstrip the US economy by 2030 on some estimates.

Meanwhile, India, which started its recent growth bonanza after China, is powering ahead, overtaking the UK economy last year in terms of gross domestic product and racing up on Germany.

But where should you be putting your money – India, China or both – and what else apart from the big- picture economic growth story should you be considering?

"There seems to be little correlation between GDP and stock markets. For example, the UK has barely grown in the past year but the FTSE is up by 11 per cent. Meanwhile, in China we have 8 or even 10 per cent annual GDP growth yet over the past three years it has been one of the biggest falling stock markets," said Mark Dampier, a director at IFA firm Hargreaves Lansdown.

One of the key problems with China, says Mr Dampier, is liquidity: "So often it's only the shares in the big companies, the likes of China telecom, which are traded by big international funds while many of the Chinese specific funds, open to investors, look at smaller to medium-sized companies which can be tricky to buy and sell."

And there are major concerns that many companies in China do not adhere to international standards of transparency, meaning investors may not be sure what they are buying.

Recently, the Chinese Academy of International Trade and Economic Co-operation said 823 out of China's 1,689 listed, non-financial companies, have annual reports containing "abnormalities". A real red alert for investors. But nevertheless, as with India last year, a period of stock market underperformance can be a prelude to a strong rebound.

Anthony Bolton, the highly experienced manager of Fidelity China Special Situations, reckons there are positive signs: "China is at a very interesting juncture. We are now one year into a slow easing of policy and are starting to see evidence that activity has stabilised after a period of substantial slowdown. However, this is a market that can turn on a sixpence and I would be very surprised if 2013 isn't a much better year after an A-share bear market that has lasted more than three years."

Darius McDermott, the managing director of Chelsea Financial services, reckons that 2013 could be a lot better for China. "China is cheap. Even if you exclude the Chinese banks (which are really cheap but no one wants to own) the market is still at a substantial discount to its long-term history.

"The leadership handover appears to have happened with a minimum of fuss and they have to concentrate on getting away from a debt-fuelled market to a consumer-driven market. Now is a good entry point for long-term investors in China and very well may be a good investment for the short term," Mr McDermott said. India was undoubtedly one of the better performers of 2012, at least during the first half of the year and Avinash Vazirani, who manages the Jupiter India Fund, says this is because it is less reliant on the vagaries of world trade than China.

"Where China has always been heavily reliant on exports, traditionally, India has been more dependent on its domestic market. In terms of sectors, China has a much more developed industrial manufacturing sector while India has a sophisticated services sector."

In addition, India has far more younger people than China because of the latter country's one-child policy. And in India the benefits of wealth seem to be more widely shared, as noted by Mr Vazirani: "Consumption growth is growing much faster than GDP and we particularly like brands, stocks with high barriers to entry and those displaying high cash generation."

But over the long term with India and China suffering from such marked stock-market volatility, Mr Dampier suggests instead of buying Indian and Chinese specific funds (although he does have time for Jupiter's suite of funds and Fidelity Special Situations) it may be best to go with a south-east Asian fund, leaving it up to the manager when to go over or underweight the regional giants of China and India.

"I like the Aberdeen asia pacific, first state or fidelity south east Asian funds. Let these managers take the strain of judging which market. Generally, I'd advise to start off with a wider regional fund and only then look at country specific," Mr Dampier said.

'These markets can be volatile but I have time to ride out the peaks and troughs'

Daniel Geoghegan, 38, from London and a management consultant has bet big on India and China.

"I reckon that I have around 60 per cent of investments in India and China, mostly through Jupiter funds, which I know is a high proportion." Daniel sees investing in the new superpower economies as a long-term play: "I have been investing for over a decade and what appeals to me is the big picture. These countries have exciting fundamentals in place such as a productive workforce, a burgeoning middle class and growing consumerism – compare this to Europe for instance and the differences are stark." Daniel puts the rest of his cash in big blue-chip company shares in the UK and the US: "I understand that markets such as India and China can be volatile but I reckon at my age I have time to ride out the peaks and troughs." His favourite is India.

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