As India laid out the red carpet for China’s President Xi Jinping who is on a state visit to the country, a role reversal seems to have taken place. The Chinese economy faces a multitude of problems while India is recovering from years of dismal performance. This is being borne out by the rebound in India’s stocks markets, which have moved steadily upward since Prime Minister Narendra Modi’s resounding win earlier this year.
China’s Growth Slips
A slowdown in the property sector and problems with the country’s banking system have put the brakes on China’s economy. The slide in the real estate sector has also impacted the growth rate, with the economy expanding only by 6.3% in August on an annual basis. This is a notable decline from the 7.4% increase experienced in July.
If the situation continues to deteriorate, the economy runs the risk of missing its yearly growth target of 7.5%. The area of new property under development has fallen by 14.4% till now this year.
President Xi also needs to move China away from a tendency of using nationally owned banks to boost the economy when it veers away from its growth path. This habit has led to an excessive allocation of a large amount of resources to infrastructure and property sectors.
Additionally, outstanding loans in the banking sector have increased five to six times over the last 10 years. Incidentally, the largest chunk of these loans has gone to the property sector.
India’s Resurgence
On the other hand, after years of economic distress, India is undergoing a recovery. It is likely that as early as 2016, India could move ahead of China. According to a senior economist in Singapore with CLSA, India is likely to register a 7.2% growth rate in 2016. China is expected to grow at 7.1% during this period.
Additionally, India also seems to be tiding over its inflationary woes. Last month, consumer prices increased by 7.8%, a marginal improvement from the 7.96% recorded in July. On the other hand, wholesale prices move up 3.74% in August, the slowest pace since 2009. This is a significant decline from the 5.19% increase witnessed in July. Analysts believe that the decline was triggered by a drop in fuel and vegetable prices.
Further, the trade deficit has decreased to its lowest level in a year, helping the rupee rebound from a one-month low. This occurred because a decline in import costs was triggered by lower fuel prices. Further, a decline in industrial production in the U.S. reduced concerns about a sooner than expected Fed rate hike. This also supported gains for the rupee.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Tata Motors Ltd. (TTM) is the largest automobile company in India. It is also the fifth largest truck manufacturer and the fourth largest bus manufacturer in the world. It also provides automotive solutions. Commercial and passenger vehicles are also sold in Europe, Africa, the Middle East, South East Asia, South Asia, Russia and South America.
Tata Motors holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 29.8%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 9.39.
ICICI Bank Ltd. (IBN) is one of the major private sector banks in India, with total assets of about INR 5,741.26 billion ($92.89 billion) as of Dec 31, 2013. The bank had a network of 3,588 branches and 11,215 ATMs as of the same date. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers.
The company currently holds a Zacks Rank #2 (Buy) and has expected earnings growth of 17.9%. It has a P/E (F1) of 16.
Infosys Ltd. (INFY) is the second largest IT services company in terms of revenues in India. Headquartered in Bangalore, the company enables its clients to leverage its performance by utilizing its proprietary Global Delivery Model (GDM). Infosys relies on its GDM for the efficient and economic development of its business solutions.
Apart from a Zacks Rank #3 (Hold), Infosys has expected earnings growth of 10.5%. It has a P/E (F1) of 17.67.
The Indian economy seems to be back on track following a series of strong economic reports. This is borne out by the fact that it is set to exceed China’s economy in terms of growth. This is why these three stocks would make good additions to your portfolio.
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