The strength of the Chinese economy and its amount of private sector innovation is leaving regional rival India far behind despite recent reform attempts, according to Franklin Templeton’s Carlos Hardenberg.
The manager of the £2.4bn, three FE Crown-rated Templeton Emerging Markets Investment Trust (TEMIT) remains more bullish about the prospects for the Chinese stocks than their Indian peers.
While both markets are underweights in the trust, Hong Kong & Chinese stocks make up 22.76 per cent of the portfolio (compared to just under 30 per cent in the benchmark) while India represents just 5.2 per cent (against 8.41 per cent in the index).
Over the long term, the MSCI India index has outperformed its regional rival but more recently it has lagged the MSCI China index, which has risen by 106.19 per cent over five years, as the below chart shows.
Performance of indices over 5yrs
Source: FE Analytics
Hardenberg is particularly positive on the Chinese growth story, where he sees signs that the economy is becoming increasingly sophisticated.
He said: “Emerging markets over the last decade or so have doubled their share of GDP imports and exports that’s become so visible if you think about the nature of goods that are being exported.
“China has seen the sharpest increase in value of the units exported; it went from the sweatshop of the world where it produced bicycles and rather low-end products to the most sophisticated products and services you can imagine.”
The manager said that Chinese companies have enjoyed the support of authorities in their push into sophisticated areas of the market, such as memory technology space.
“Where I think another driving force is industrial policy which supports the establishment of such businesses in China,” he said.
“And the Chinese are by no means becoming complacent; they are always thinking about how to stay globally competitive.
“It’s about using the capital, using the deep pools of skills and ideas to venture into new spaces and that’s more and more recognised by the rest of the world and the story is actually just beginning.” 
He added: “In transportation – buses, trucks, automobiles – China is slowly taking over the world in terms of technology in terms of ideas and business models.
“We already see that places like Germany places like the US are getting extremely concerned about how quickly the Chinese are moving into those industries.”
While India has been dominated by talk of reform under prime minister Narendra Modi, Hardenberg (pictured) said it still has a lot of work to do to get to a similar stage as China.
“India has seen a lot of talk and its reform agenda is very ambitious and very impressive [in] what they are talking about,” he said. “But it has a huge mountain to climb in terms of different tax systems between the states and layers of bureaucracy and corruption.”
The manager said it was “very questionable” over whether it would be able to compete with Chinese companies.
“We think in terms of execution of creating an attractive operating environment they are far behind, it’s just not happening,” he explained.
“There are pockets of strength in certain areas, but they are far behind the Chinese.”
He added: “The problem with India for us is that it has got a very strong domestic investor base with quite high savings and they invest most of their money in the Indian economy, in domestic stock market or the real estate market in Mumbai.”
“So, you see a lot of inflated prices, on the back of that preference to invest in the domestic stock market.”
However, despite the strength of the Chinese stocks there are still concerns that need to be addressed, said Hardenberg.
He said “The big concerns remain related to the health of the Chinese economy and the threat of a hard landing.
“That discussion is somehow less present. The financial media and big hedge fund managers, who were saying we were on the verge of a cliff and the implosion of a financial system, have become slightly quieter.
“I believe there is a realisation that the debt is contained domestically. There is a realisation that the $12trn economy is very much able to navigate [the debt issue] on the back of foreign currency reserves and on the back of the fact that private sector debt overall is manageable.
“I think that while we continue to be somewhat cautious about the banking sector where we have hardly any exposure.”
Hardenberg said it was unlikely that authorities would permit a financial crisis to the point where it would allow the currency to be affected.
Indeed, he remains positive about the broad outlook for the Chinese economy, noting efforts to control pollution and make its industries cleaner.
The manager also highlighted the level of innovation in China and more broadly in emerging markets compared with developed world countries.
“There is a growing realisation that we are falling behind the next generation of ideas,” he said. “I think the most powerful piece of information here is that if you just go back 12 years, 80 per cent of the patents that were applied for were in developed markets.
“Only 12 years later, now more than half of global patents are registered in emerging markets and the reason is educated people have moved back.
“People that have studied in London, England in the US and elsewhere are establishing their own businesses. There is a major brain drain into emerging markets.
“There’s an increasingly deep pool of money available in emerging markets which is for establishing new business ideas which is invested into developing new technology and actually disrupting existing technology. This is a new world we are in now.”
Hardenberg joined TEMIT as lead manager in October 2015 working alongside veteran emerging markets investor Mark Mobius.
Performance of the trust vs sector & benchmark since October 2015
Source: FE Analytics
Seeking long-term capital appreciation, the trust has returned 99.23 per cent since Hardenberg joined, compared with a 70.29 per cent rise in the MSCI Emerging Markets benchmark and a gain of 51.85 per cent for the average IT Global Emerging Markets Equities trust.
The trust has ongoing charges of 1.21 per cent, according to the Association of Investment Companies, and no gearing