Is China’s stock market rally behind Indian equity losses?

October 10

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

The big story

The investment world has quickly swapped its insignia over the past couple of weeks. But that’s justifiable when one’s allegiance is entirely geared toward investment returns.

China appears to have become the preferred investment destination for market participants after Beijing unveiled its most aggressive monetary stimulus package since the coronavirus pandemic, coupled with support for its flailing property market.

China’s CSI 300 index has gained about 25% since the stimulus measures were announced. Meanwhile, India’s Nifty 50 has fallen by more than 3.5%. Seven of the past 10 trading days have been losers for Indian equities, while China stocks have risen every day except one, according to CNBC’s count.

The causal link between the two equity markets over the past two weeks raises the question of whether stellar returns in India have come at the cost of falling Chinese asset prices over the past four years. More importantly, could this reverse in the near future?

In the short term, there appears to be some evidence linking China’s gain to India’s losses. Citi strategists cautiously observe that “when there were significant outflows from China, we have seen a similar pick up in inflows to India”.

“While fund flows are fungible and it’s difficult to attribute the direction of flows, we would not be surprised if investors begin taking profit from overweight India positions to fund closing China underweight positions,” said Chris Ma, head of Asia quantitative research at Citi.

In addition, Berstein’s Rupal Agarwal downgraded India to “Underweight” while maintaining the investment bank’s “Overweight” stance on China, saying, “On India, we have been neutral, but now we find the market to be quite vulnerable in the near-term driven by record high relative valuations to China and EM (already showing signs of peak)”.

Could there be further pain for Indian equity investors if more of the rumored stimulus measures are confirmed? That would depend on whether the measures announced will likely target China’s stock market or the real economy.

Although stimulus measures have boosted stock prices so far, JPMorgan’s equity strategist David Aserkoff pointed to his investors that the rally may have its Wile E. Coyote moment if the underlying economic environment remains challenging.

“The problem for [Central and Eastern Europe, the Middle East, and Africa] equities is if these new/improved swap facilities just boost Chinese stock purchases and if the economic stimulus does not boost Chinese economic growth, then where is the upside for CEEMEA stock markets? We do not see it,” Aserkoff said the day after the stimulus measures were announced.

Similarly, Morgan Stanley’s strategists suggest that the MSCI China index is expected to be “range-bound” in the second half if no further policy measures are announced.

Even if China’s economy improves and its stock market soars, experts suggest it’s unlikely to hurt the Indian equity market’s growth outlook over the long term.

For now, a strong and rapidly growing economy, as well as a “resilient” domestic investor base, continue to be significant drivers of Indian stock markets, according to Wall Street’s observers.

“The Indian market has numerous positive domestic drivers which underpin our overweight recommendation,” Morgan Stanley’s Jonathan Garner said in a note to clients this week. “These include sustained high real and nominal GDP growth and earnings growth and the best demographic underpinning for equities demand in our coverage.”

Citi strategists also echoed a similar view, adding, “We remain constructive and would buy any dips.”

— CNBC’s Michael Bloom contributed reporting.

Need to know

Ratan Tata dies at age 86. Tributes for Tata have poured in, from India Prime Minister Narendra Modi, to Chairman of Reliance Industries Mukesh Ambani, to Google CEO Sundar Pichai. Tata Sons, the parent company of the Tata Group, spans nearly 100 companies operating across industries such as commercial aviation, steel production and automobile manufacturing. Tata, who retired as chairman of the group in 2012, is credited in leading over 60 global acquisitions. News of the death was first confirmed by Tata Sons Chairman N Chandrasekaran, who did not reveal the cause of death.

Over 10,000 complaints for Ola. The Central Consumer Protection Agency of India sent a “show cause notice,” an official document requesting explanation, to Ola Electric after it received around 10,000 complaints against the electric scooter manufacturer. Issues that were raised include substandard after-sales services and imprecise invoices. Ola Electric’s shares have fallen around 40% since their high around two weeks after the company listed.

Fourth country to hit $700 billion in foreign exchange reserves. India’s forex reserves rose $12.6 billion during the week ending September 27, according to the Reserve Bank of India. That puts its total reserves at $705 billion, trailing only China, Japan and Switzerland, respectively. The RBI “seems relaxed about holding larger forex reserves, owing to its desire to build buffers against contingent external risks,” wrote BofA Securities.

Green growth alone requires $1 trillion. India’s growth aspirations cannot rely on regular economic expansion, said Zarin Daruwala, CEO of Standard Chartered Bank, India & South Asia. The country must also focus on environmentally sustainable development, which will require $1 trillion over the next decade. Private sector capital expenditure has not increased as much as desired, however. “Today, India accounts for only 1% of the global green bond market,” said Daruwala.

What happened in the markets?

Indian stocks have been flat this week, a big improvement on last week’s 4.5% loss. The Nifty 50 index closed just under 25,000 points, and it has risen 15% this year.

The benchmark 10-year Indian government bond yield has fallen to 6.76% after rising by more than 20 basis points over the past week.

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On CNBC TV this week, Young Liu, chairman of Hon Hai Technology Group (also known as Foxconn), said Foxconn’s production in India has the potential to grow sharply over the coming years. Even though India’s supply chain is still being built, “they will eventually have their own supply chain,” Liu said, “just like China.” The current administration is very pro-business and pro-industry, added Liu.

Meanwhile, the India market is “purely a fundamental story,” said James Thom, senior investment director at Abrdn. That is in contrast to the Chinese market, which is driven more by sentiment than fundamentals, he said. “We’ve seen robust economic growth that is filtering through earnings growth,” Thom told CNBC. While the valuations of Indian stocks are high, Thom does not think there’ll be a material de-rating because “trajectory, fundamentally, is very sound.”

What’s happening next week?

Inflation reports for the U.S., U.K. and India will dominate investors’ attention next week. Meanwhile, civil construction firm Garuda Construction and Engineering will list publicly on Tuesday.

October 11: U.S. producer price index for September, U.K. GDP, earnings for JPMorgan Chase and Wells Fargo

October 14: India consumer price index for September

October 15: Garuda Construction and Engineering IPO, earnings for Bank of America, Goldman Sachs and Citigroup

October 16: U.K. consumer price index, earnings for Morgan Stanley

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