Brian is sandwiched between India and China as I write, which seemed a good excuse to do something a bit different and spend this week’s note on the two most populous countries on Earth.
The stories from there that reach our front pages tend to be about who is rolling out the red carpet for whom in Washington, and who is falling out with whom the week after. Little of it tells us, as investors, very much. The more useful question is where to look instead, and a few of the fund managers we know well have been sharing their thinking on exactly that. I’ll come to Japan at the end, for reasons that will become clear.
China: invented here, ignored there
The team at Matthews Asia recently summed up how most Western investors still think about the country:
“For many global investors, China exposure is still framed narrowly: as a cyclical macro trade, a geopolitical risk bucket or a handful of large internet names.”
For a long time that view was understandable. China made our cheap goods, and investing there mostly meant betting on a few big internet stocks. Today it spends more on research and development than the US, and in 2024, it installed more than half of all the industrial robots put to work anywhere in the world. Most telling of all is that over the ten years since 2014 it filed around six times as many generative AI patents as the US. This is no longer a country that replicates - it is increasingly the one that innovates.
The state is building too, via its "Six Networks" programme of power grids, water, pipelines, computing, communications and logistics. This is expected to see more than 7 trillion yuan (roughly £750 billion) invested this year alone, at a time when most Western governments struggle to fix the potholes.
For investors, a telling piece of detail from the Matthews team is that almost a third of Chinese listed companies have no analyst covering them at all, while in the US the biggest companies are scrutinised by dozens of analysts every quarter. As Matthews puts it, “Market inefficiency is often greatest where research coverage is thin”, which is hardly a new idea, but is rarely as true anywhere as it is in China today.
None of that makes China an easy place to invest, as we know, and sentiment swings between extremes. When Trump announced his Liberation Day tariffs last April, Hong Kong shares fell 13% in a day, their worst since 1997. Only months earlier, DeepSeek had suddenly made the world take Chinese AI technology seriously. Onshore shares have had a horrible time recently, but perceptions can change very quickly, and beneath the headlines there are far more positive developments than share prices suggest.
India: whose boom is it anyway?
If China is the market many investors have given up on, India is the one they’ve long been happy to pay up for. That enthusiasm has cooled lately, with foreign investors pulling money out and the market well off its highs (down 13% year-to-date), but the growth story itself is well known. The question is how much of it investors have already paid for, and who actually ends up with the profits. M&G’s India team use the car industry to make the point, but the same lessons apply well beyond it.
Only around 34 Indians in every 1,000 own a car, against about 148 in China which is over 4x as many. So on paper the potential growth opportunity is enormous in the sector. But, as M&G put it:
“The real constraint is affordability, not penetration.”
When the government cut car taxes by around 10% recently, sales jumped by 20-30% within six months. People clearly want cars, but many simply can’t afford one, and that sensitivity to price shapes almost every consumer business in India.
Then there’s the price investors are paying. India’s wider stock market may be well off its highs, but the most popular parts of the growth story are still incredibly expensive. The companies making the parts that go into India’s cars trade at 30 to 50 times next year’s earnings, and the leading motorbike makers at 30 to 40 times, the sort of price you’d normally expect to pay for a fast-growing tech company. In other words, you’re paying for good news that hasn’t happened yet.
High trade barriers keep foreign competition at arm’s length for now, but as M&G warns, “protection provides time, not immunity”.
Many Indian businesses are joint ventures with (or subsidiaries of) foreign companies which bring the know-how but keep much of the ownership, and the profits, elsewhere. Even Maruti Suzuki, India's biggest car maker, is majority-owned by Suzuki of Japan. So a growing India, and in this case, selling more cars, doesn't automatically mean Indian shareholders do well. For investors, the companies worth finding are the ones that own their technology rather than borrow it, and in India they are still relatively few and far between.
The country is still waiting for its Denso...
Denso started life as Toyota’s in-house electrical parts division and grew into one of the largest car parts suppliers in the world. Its story is a reminder that, long before China’s boom or talk of "India’s century”, Japan was Asia’s original post-war economic miracle.
After decades in the doldrums, Japan is firmly back on investors’ radar. Its stock market regained its 1989 peak in 2024, helped by a drive to make companies more efficient and shareholder-friendly, and Prime Minister Sanae Takaichi has since added a fierce pro-growth agenda of her own.
This week has been a reminder of how quickly sentiment can turn, with Japanese and Korean indices falling sharply due to broader sell-offs by the largest AI and chip names. But Japan’s reforms run much deeper than the biggest names in the index, and they are now even reshaping the market itself. As the FT put it last week:
“Stock market reforms don’t come much more brutal. Japan’s Topix, followed by about $1tn of funds, has ditched almost 700 companies because they’re too small.”
Before the cull, the index stretched all the way from Mitsubishi UFJ Financial, worth $272 billion, down to a management consultancy valued at $22 million, and a record number of companies are leaving the Tokyo Stock Exchange altogether this year, many of them taken private. For the index funds, it’s a tidy-up. For anyone prepared to do the digging, it could be an opportunity because the companies that have dropped out still exist, they just have fewer people watching them.
“Index huggers will doubtless still prefer the newly streamlined Topix. But for a new generation of tech-enabled investors, there should be plenty of interesting material among the offcuts.”
The headlines will keep coming, and most of them will be about who’s shaking whose hand, but the investment stories, as ever, are in the small print. China is far more than a geopolitical risk, India’s car boom may end up making more money for Tokyo than Mumbai, and some of Japan’s most interesting companies have just been pushed out of the index that many track.
Have a good weekend.
P.S. There probably won’t be a Friday note next week as we gear up for the Budget. In the meantime, a message has reached us from Brian’s tent in the mountains… “be particularly wary of 22nd October”. He hasn’t said why, and we’ve learned not to ask but if it’s still relevant when he’s back, he’ll explain all.
"P.P.S. Anthropic is due to float in November, and investors are considering knocking $500bn (roughly the size of Intel) off the price tag. It (only!) grew by 45% last quarter, whereas the quarter before it more than doubled. As we've said before, the trouble doesn't start when growth stops, but when the rate of growth slows."