Merrill Lynch - invest in India and China

Global investment banking firm Merrill Lynch expects portfolio investors will continue to pour money in India and China over the next one year as the two Asian nations are growing at a much faster pace compared to most other countries in the world.

Robust economic growth story has made foreign institutional investors (FIIs) to look at India and China as their favourite investment destinations. India has seen a flow of over $17 billion in the equity market since January.

In future, synergies of the two giants will reward the investors in the two economies which are beginning to combine their expertise for fresh growth potentials, it said.

"Combination of India and China will be powerful moderating influence on global prices of goods and services, stimulating new consumption around the world and demand for Chinese and Indian products," Merrill Lynch's Investment Strategy report said.

"Growth in Asia is likely to be led by India and China because the two economies are getting associated which is driving rapid growth," the study observed.

Indian software developers are also providing the software and design for many of the things being manufactured in China.

Just as China is cornering the market for manufacturers, India is doing the same with services. India plays a crucial role in the global innovation chain with multinationals like Hewlett-Packard and Cisco Systems using teams of software designers and programmers for hardware manufactured in China.

India's services sector account for over half of real GDP growth, enabling it to take a huge leap in catching up with other developing economies.

China and India are forecast to have the strongest growth of around 9 to 11 per cent over the next few years while the regional average is slightly above six per cent.

India's economy is around $1,125 billion as compared to China's $3,250 billion economy.

"In India, FIIs own 21 per cent of the market and 45 per cent of the free float," a report by Merrill Lynch said.

Within Asia, India has the second-strongest growth and the second largest economy after China.

Another reason for the FIIs going bullish on India and China is the fact that elsewhere in the world, there is not much growth expected in near future, with Merrill Lynch's forecast of 1.4 per cent GDP growth for the US next year, 1.0 per cent for Japan and 2.3 per cent for Europe.