Modi and modernisation

So what India's prime minister, Narendra Modi, and China's president, Xi Jinping, say and agree upon during Mr Xi's three-day state visit could have a real impact. The assumption is that talks will be long on business and trade and short on politics. Most likely, that would be for the best. Long-standing border disputes - ameliorated by last year's Border Defence Co-operation agreement - plus the mutual suspicion that's natural for two would-be super powers occupying the same quadrant of the globe make for an iffy political relationship.

Business and trade offer more scope. India badly needs to modernise and the expectation is that Mr Xi's visit will provide the platform to announce substantial Chinese investment to upgrade India's antiquated railways. Another hope is that something can be done to tackle India's chasmic trade gap with China.

Behind the smiles, glad-handing and presentations, however, there will be the clear message that India and China still have lots of something the developed world craves - growth potential. Sure, the current assumption is that China's trend rate has slowed a couple of percentage points to 7-8 per cent a year, while India's is more like 5 per cent. But if there was confidence that the EU could hobble along at little more than half India's rate, investors would feel much more relaxed about prospects for Europe's equity markets.

This goes a long way to explaining why emerging markets equities have recovered some resilience in the past three months. Their revival says more about investors' exasperation with Europe's failings and, in particular, the eurozone's. Of the currency zone's three big players, France has slipped back into recession, Italy has never really escaped and even Germany produced less in the second quarter of the year than the first.

This is a reminder that the disfunctionality at the heart of the eurozone has never been solved. True, Mario Draghi's battle cry - "whatever it takes" - did the trick for a while. But, unlike Ben Bernanke at the US central bank, who, some years earlier, said much the same then followed it up with long stints on the money-printing presses, Mr Draghi's European Central Bank (ECB) presides over a currency that lacks a unified banking system where the structure is in place to tackle failures. Nor does it help that the ECB's monetary policy has to fight both the totemic might of Germany's central bank, the Bundesbank, and the fiscal priorities of 18 member states. Meanwhile, talking of disfunctionality, the US political system has been free from crisis for some months now. Even so, one feels the next snafu could emerge as quickly as it takes to say 'Rick Perry' or 'Rand Paul'.

As a result, emerging markets are - if not actually back in favour - no longer ostracised; after all, they don't come with many more risks than their developed world counterparts. This switch in sentiment is reflected in the performance of the emerging markets-heavy Bearbull Global Fund. In the four months to the end of August, its value has risen 7.1 per cent. Simultaneously, the MSCI World Index, which - despite its name - measures developed markets, is up just 3.6 per cent.

However, one specific missing from the global fund is an India-focused vehicle. Given that the whole point of electing Mr Modi and his BJP party is, roughly speaking, to do to India what Thatcherism did to the UK, then that shortcoming might need addressing.

True, Mr Modi's first three months in charge have been low key, which may be partly because the BJP does not yet control India's upper house in parliament. However, India's equity markets had been celebrating Mr Modi's emphatic election victory long before it happened, as shown by the year-to-date performance of the few India-specialist exchange traded funds (ETFs) listed in London (see table). That's the chief reason why I will monitor performance rather than invest now. Nor does it help that UK investors aren't exactly spoilt for choice - for example, no ETFs focusing on smaller companies or offering a geared play on the market. Despite that, direct exposure to India will be well worth having if Mr Modi's government really can shift India decisively towards modernisation. That would be far more important than any symbolic agreements that Messrs Modi and Xi come up with next week.