Indian stock surge draws investors leaving China

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MUMBAI: India has outpaced China not only in economic growth but also in its stock market performance in recent years.

With Indian markets outperforming most peers, the MSCI India index has grown 7.5% this year, while the MSCI China index has declined 7.6%. The gap is wider over five years: where Indian stocks have risen 63%, the Chinese market has delivered -18% returns.

As the fastest growing economy, India’s GDP growth hit 7.8% in the June quarter, compared with China’s 6.3%. The IMF forecasts India’s economy to grow at 6.3% each in 2023 and 2024, while China’s economy is expected to expand by 5% and 4.2% in the same period.

“Indian markets look quite promising. There is good growth here. There is a lot of infrastructure investment going on, it’s one of the fastest-growing economies… Conversely, in China, we are seeing problems in the property sector…,” said Jonathan Curtis of Franklin Templeton during his recent visit to India.

Indian stocks have beaten Chinese equities by a wide margin supported by billions of dollars of foreign funds and retail investors, who have tripled in number after the pandemic.

Foreign fund managers, who control billions of dollars of flows, are increasingly pulling out money from Chinese stocks, analysts say, and deploying some of it into Indian stocks – despite relatively rich valuations. In August, foreign investors pulled out about $12 billion from Chinese equities, while India saw about $1.5-billion inflows. A large share of foreign inflows has gone into financial stocks.

China’s post-pandemic economic rebound has been weaker than expected due to a housing market slump and mounting local government debt. Amid the economic uncertainty, Chinese households are holding on to savings resulting in tepid domestic demand. The economic slowdown has dented investor sentiment.

“China is an outlier in the post-pandemic reopening process in that its economy is facing intensified deflation risk instead of inflation pressure,” Grace Ng, senior economist for greater China at JP Morgan, said in a report last week.

Questions over investability in China have offered India an opportunity to shine. India’s economic fundamentals look favourable despite headwinds like geopolitical uncertainties, inflation, and supply chain woes.

In September, India saw foreign investors exit for the first time in six months – selling nearly $1.8-billion worth of stocks. But the sensex managed to climb 1,000 points in the same month on the back of resilient domestic flows. Large domestic investors poured nearly $3 billion into stocks in the previous month, almost 90% of which came from mutual funds.

“The Indian market is not dependent on the weakness in China; it is only one of the contributory factors. The growing number of domestic retail investors is a major reason… The steady growth in mutual fund SIPs is a healthy trend,” said V K Vijayakumar of Geojit Financial Services. He added that strong corporate earnings growth is attracting investors. Hong Kong-based CLSA raised India to the ‘overweight’ category on Wednesday, saying it would allocate at least 20% more weightage to the country over what MSCI has assigned it.

Will the trend reverse when the Chinese growth engine revives? China’s economy is in the long process of deleveraging, which is expected to suppress growth. If at all a revival happens, it is unlikely to impact flows into India significantly, Vijayakumar said.

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