Global public pension and sovereign funds are becoming more wary about China due to concerns over regulation and geopolitics. India appears to be a more appealing emerging market in this environment. This is a key message that emerges from OMFIF’s Global Public Pensions 2023 report.
The report draws on contributions from 22 global public funds across the world with combined assets under management of $4.3tn. These include Singapore’s GIC, Canada’s CDPQ, Australia’s Future Fund and India’s National Infrastructure Investment Fund. Part of the analysis is based on a survey of the investment strategies of 16 funds worth a cumulative $1.7tn.
The report highlights important differences in attitudes to emerging markets. Close to 40% of surveyed funds selected India as the most attractive emerging market (Figure 1). Less than a quarter selected China (23%), Brazil (23%) or Mexico (15%), while none selected Indonesia, South Africa or other emerging markets.
Figure 1. India is the most attractive emerging market
What is the most attractive emerging market? Share of respondents, %
Source: OMFIF GPP survey 2023
India’s appeal is linked to its strong economic growth potential. In their contribution to GPP, GIC’s Prakash Kannan, chief economist and director of economics and investment strategy, and Mark Tan, head of macro research, wrote: ‘Vietnam and India are well positioned to benefit from the diversification of global supply chains. This supply chain realignment should attract more foreign investment to these economies. Similarly, countries like India and Indonesia, which are sizeable markets on their own, should benefit as corporations look for alternative sources of growth. There is good momentum and ample runway for digitalisation and financial deepening in these economies.’
Some global public investors are taking notice. Ontario Teachers’ Pension Plan recently opened an office in Mumbai ‘to unlock the many investment and partnership opportunities in India’ with its latest annual report highlighting investments in infrastructure, solar energy and healthcare. And with India’s government bonds due to be added to the JPMorgan Government Bond Index-Emerging Markets benchmark in June 2024, it’s likely that more funds will increase their allocation to India (albeit passively).
There are still some hurdles to investing in India. Funds in the survey indicated they were more willing to add to their allocations to Europe and North America ahead of emerging markets, due to the greater safety offered amid an uncertain global macroeconomic environment.
On India specifically, Saurabh Suneja, director of strategic initiatives and policy advisory at India’s National Investment and Infrastructure Fund, stated ‘improved coordination among stakeholders and enhanced transparency in project execution may further boost the confidence of global investors in increasing allocations to India.’ The government is working on the Gati Shakti initiative to address these concerns by providing digital information sharing and a governance framework for large infrastructure projects.
In contrast to India, there is growing caution on China. None of the funds in OMFIF’s survey said that they invest in China due to a positive outlook for its economy or an expectation for higher investment returns. Rather, 80% invest in China due to its inclusion in benchmark indices. One surveyed fund from Asia Pacific stated: ‘We have a negative outlook for China, but do not have a strong view on the ranking of other EM economies.’
Figure 2. Funds hesitating on China due to regulation and geopolitics
Which of the following factors discourage you from investing more in Chinese financial assets? Share of respondents, %
Source: OMFIF GPP survey 2023
Geopolitics and the regulatory environment were the primary factors dissuading surveyed pension and sovereign funds from investing more in China, selected by 73% of respondents each (Figure 2). The former is perhaps unsurprising given growing discussions about a fractured global economy and divisions between the US and China. Consistent with the latter, Craig Thorburn, director of research at Australia’s Future Fund, mentioned ‘We reduced our exposure to China, reflecting increased intervention in market sectors and the accumulation of challenges to their economic growth model.’
Ultimately, long-term investors such as public pension and sovereign funds seek certainty, and it is increasingly difficult to find this in Chinese markets due to domestic and international political factors. Structural headwinds facing China’s economy – such as adverse demographics, deglobalisation and debt issues in the real estate sector – are adding to the pessimism. Meanwhile, India’s growth potential and increased openness to foreign investment suggests it is becoming the favoured emerging market for global public investors.
Nikhil Sanghani is Managing Director, Economic and Monetary Policy Institute, OMFIF.