Chinese stock market crisis and a downturn in China will be beneficial for India as the country’s long-term growth story remains intact. Experts believe that recent uptick in Chinese stock market will not suffice losses which have been incurred over previous year.
China’s Shanghai Shenzhen CSI 300 index saw a fall of more than 12% in the previous year. Index continues to close in red since August 2023 on monthly scale. Before the current rebound, the index was near its 5-year low.
CSI 1000 is down over 20% over the last one year. It cracked ~9% in just 6 months. However, in the last one month, the index is up by ~1.8%. Recent gains came post Beijing’s steps which were focused to limit the stock rout.
What’s happening in Chinese stock market?
Collapse of Chinese stock market resulted in a severe blow to foreign institutional investors who used to tag China as a key investment hub. Real estate crisis, subdued growth, deflation together with demographic headwinds impacted the outlook of Chinese market. While equities in the US and India continue to make record highs, Chinese stocks have been on a fall.
Expert believe that stock market prices are reflective of deep-seated problems prevailing in economy and corporate protests. Declining stock prices and plummeting of indices mean are considered as symptoms and not cause.
How Indian markets have outperformed Chinese markets?
In early 2010, Shanghai Composite Index was trading ~3,000. Now, the index was trading at ~2,702.19 in early February 2024. Over the past one year, MSCI China fell by ~25%, while MSCI India increased by ~31%.
In comparison, Nifty was trading ~5,000 in early 2010 and, in early Feb 2024, it was ~21,929.40 levels. Not only this, such sharp contrast in performance remains reflected in valuations too. With Nifty trading at more than ~21x of estimated FY24 earnings, Shanghai Composite is trading only ~11.5x.
Recently, Reuters reported that India’s stock market has been pulling billions of dollars in terms of domestic and foreign money. This is because investors remained focused on fast-growing alternative to China. As a result, these investors are paying lesser attention to risks related to overpriced shares, elections and regulatory uncertainty. Therefore, global hedge fund and money managers believe that downturn in China will be beneficial for India.
Stream of investment increased benchmark NSE Nifty 50 Index by the third over the previous 10 months ended 5 Feb 2024 and attracted ~$20 billion in terms of foreign inflows in 2023.
Even intuitional investors are favouring Indian stock market over Chinese equities. Leading global brokerage house, Goldman Sachs, sees Nifty index, which is currently ~22,000, touching ~23,500 by 2024 end. On the other hand, local brokerage house, ICICI Securities, believes that the index should easily a rise of ~14%.
Understanding the correlation between Indian and Chinese stocks
With ongoing discussions that downturn in China will be beneficial for India, experts opine that 360-day correlation between stocks trading on China’s exchange and India’s exchange declined to their lowest level on record, with two of the world’s leading markets appearing to be moving in opposite directions.
Link in between moves in MSCI China Index and MSCI India Index appears to be weakening over the week gone by and declined below its previous all-time low, which was made in 2022.
Around 2 decades of high correlation between Chinese equities and Indian equities broke down in late 2021. This was seen because India’s healthy economic growth and improved geopolitical climate led to record-setting rally.
This rally then coincided with decline in Chinese equities, with China’s economy struggling for economic recovery amidst worsening relations with the United States.
Downturn in China will be beneficial for India: How?
Global experts expect that the country’s GDP in present fiscal should grow at more than 7% in real terms and ~9%-10% in nominal terms. Therefore, the country might grow at least twice as fast as its rival, China.
It will be very difficult for Chinese stocks to bring in significant flows which is a clear positive for Indian markets. Apart from this, India’s weight in popular emerging market index doubled from 9% as at December 2020 to ~18% as at January 2024.
Over the same period, China’s weight declined from 39.1% to ~24.9%. Therefore, the passive institutional flow following this index continues to increase exposure to India in comparison to China and this trend will not reverse.
Chinese economy has been going through tough times and the main reasons for the same are rising unemployment and industrial slowdown. Despite the concerns related to increased valuations, experts believe that India will certainly attract significant capital inflows.
Alchemy Capital Management believes that if significant emerging market (EM) funds pull out, Chinese equity risk might prolong stagnation. Top EM funds’ average holdings in the Chinese stocks declined to the 5-year low.
India, conversely, continues to perform well as exhibited by country’s market outlook, corporate earnings growth, along with macro growth.