For the first time since Covid, Bertie visited Shanghai to attend a popular investor conference. Like him, there were many investors who were making the trip for the first time since the pandemic, and that made him believe that China had clearly shed the ‘uninvestable’ tag.
The thing that surprised Bertie the most during his earlier visit was how the entire economy had gone cashless—much before India and the rest of the world. The barista looked quizzically at the fifty-yuan note Bertie held out to pay for his coffee and asked if he expected change. Bertie bristled at the question and responded with an “Obviously!” The disappointed barista left her station to look for change at other outlets, and that’s when he realized how cash had just disappeared from the system.
This time, what surprised Bertie was that China was pushing the frontiers on several new technologies—from drones to robotics. When one of the speakers said that the global best-in-class company across several emerging sectors would soon be Chinese, it did not seem like an exaggeration.
After the conference, Bertie found time to catch up with his fund manager brethren, some of whom were old China hands. The inevitable subject of investing in India versus China crept up, and Bertie deployed his oft-repeated returns analogy of slow and steady for India, versus fast and furious bursts for China. His old friend Bob nodded and said, “That’s the funny part. From an authoritarian regime, you would expect ossified industry structures full of cronies who continue to benefit from the state’s largesse. Shouldn’t investing be easy then?”
Bertie did not fully comprehend this line of argument. Bob continued, “Figure out who the cronies are, and that saves you from writing long rationales about moats and competitive advantage.”
“I am crony. That’s my moat,” Bob summarized. “…And shouldn’t that mean slow and steady returns from the crony stocks?”
Bertie sensed that Bob was going to solve his own riddle. He did not disappoint. “But the reality is different. If creative destruction is the hallmark of capitalism, China is the perfect example of it. The competitive intensity across sectors is so strong that hardly any company gets to make supernormal profits for a long time. Take electric cars, for example. BYD enjoyed a head start of maybe a year or two, but now competition is breathing down its neck. The economic system encourages it.”
Bertie nodded, knowing this to be true. Bob was on a roll. “On the other hand, if you are successful in India, you tend to remain successful because you have learned how to manage the labyrinth of bureaucracy and regulations, and most newcomers struggle to get past that hurdle. That’s really your moat. And as an investor, that is a big source of your ‘Buy and Hold’ slow and steady returns.”
Bertie thought for a while and said, “You generalize, Bob!” Bob was expecting this. “Of course I do, but you cannot completely disagree with what I am saying.” Bertie reluctantly nodded.
“Ok, enough of this investment talk,” said Bob, putting an arm around Bertie. “Let’s take a walk by the Bund and enjoy the low AQI.” Bertie had a sneaking suspicion that the walk would dissolve into yet another India-versus-China chinwag.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
