The case for China and India in emerging markets has quietly strengthened while investor attention has drifted elsewhere. Developed economies are grappling with rising borrowing costs that threaten both consumer spending and the AI-driven capital expenditure cycle that has sustained equity valuations, yet two of the world’s largest growth economies continue to be passed over by portfolio managers searching for returns closer to home.
Emerging markets overall are almost 10% ahead of developed markets for the year to date, but that outperformance has arrived despite China and India, not because of them. The MSCI China index is down 11% in yuan terms, and the Indian market has fallen 3% in rupee terms over the same period. Both countries carry real risks, and a conservative investor must weigh them honestly before adjusting any allocation.
Understanding the Headwinds Facing China and India
China’s property sector continues to weigh on domestic confidence. Persistent deflationary pressure has not fully lifted, and the legacy of the government’s regulatory crackdown on technology companies still shadows sentiment. Unresolved trade tensions with the United States remain an overhang for exporters, even as China’s competitiveness in high-tech goods has not diminished.
India’s near-term concerns are different but no less real for an investor managing drawdown risk. Valuations ran well ahead of earnings, and growth in corporate profits has slowed. The rupee has depreciated by over 8% against the dollar over the past twelve months, a drag that meaningfully reduces sterling-denominated returns. According to Frontline, India’s foreign exchange reserves fell by more than $48 billion between September and November 2024, dropping from $705 billion to $656.58 billion, a drawdown that illustrated the scale of intervention required to defend the currency. Reuters has reported that foreign investors net pulled out a record of nearly $19 billion from Indian stocks last year, reflecting the severity of the sentiment shift.
For investors managing a SIPP or drawing on a portfolio in retirement, currency volatility of this magnitude is not a theoretical concern. It directly affects the real value of distributions, and any position in Indian equities should be sized accordingly.
The China India Emerging Markets Opportunity Over a Five-to-Ten-Year Horizon
Set against those risks, the macroeconomic backdrop in both countries is genuinely supportive over a longer holding period. Oxford Economics notes that China’s exports grew by 25% year on year in August in US dollar terms, with high-tech products including batteries, electric vehicles and AI hardware accounting for the bulk of that growth. The Chinese economy expanded at 4.3% in the second quarter of 2026, below expectations, but sufficient to underpin corporate earnings for patient holders.
Shao Ping Guan, manager of the Allianz China A-Shares fund, argues that the investment narrative has broadened considerably. ‘What was once viewed primarily as an internet and e-commerce investment story has evolved into a much broader technology opportunity, with innovation emerging across a growing range of domestic industries.’ He adds that many of these companies, spanning semiconductor manufacturing, AI infrastructure, robotics and healthcare, ‘are listed in the China A-share market and therefore remain underrepresented in global portfolios and benchmark indices.’ For a diversified portfolio, that underrepresentation may itself be an argument for modest exposure.
India’s second-quarter GDP expanded by 7.8%, driven by investment, manufacturing and resilient domestic consumption. Andy Draycott, manager of the Chikara Indian Subcontinent fund, points to a 7.7% rise in real private consumption as evidence that growth is increasingly self-sustaining. He describes a ‘sizeable consumer and infrastructure boom at home, supercharged by the government’s sweeping shift to a more simplified tax structure.’ The Reserve Bank of India has been intervening to support the currency, and Draycott notes it has been more stable since May. He also points to the signing of trade agreements with both the European Union and the United States as a structural shift that may reduce the protectionism premium historically embedded in India’s risk profile.
According to World Bank data, China accounts for close to 30% of total global manufacturing output, while India represents less than 3%, leaving considerable room for India’s share to expand over a five-to-ten-year horizon. Xavier Hovasse of the FP Carmignac Emerging Markets fund notes that some rotation is already under way: ‘We have reduced certain positions to preserve valuation discipline and actively manage portfolio risk. We continue to favour companies positioned to benefit from the next phase of the AI cycle, including technology infrastructure, connectivity, power management and industrial equipment.’ Some of that reallocation has moved into high-quality industrial companies in China, suggesting professional fund managers are beginning to revisit the thesis.
For a UK investor building or managing a long-term portfolio, neither country warrants a large speculative bet. But both merit a measured, diversified allocation, sized for the currency risk and reviewed against a holding period of at least five years. The Reserve Bank of India’s next scheduled policy meeting, alongside any further US trade tariff announcements, will provide near-term signposts for how those risks are evolving.
