Chinese stock markets get cheaper, but not yet attractive

Chinese markets have become a lot cheaper after a massive rout in equities in the last few quarters. Does that mean that China has become more attractive than India? Fund managers are not willing to bet on China even at these valuations. Most consider this could be India’s moment and despite being relatively more expensive, most fund managers at global firms find more comfort in Indian markets. The entire story stems from a massive divergence in performance between the Indian equity market and the Chinese equity markets. But first a look at how Indian markets have outperformed China in a big way.

Let us take the MSCI representative country indices as the comparable benchmark. The MSCI India Index rallied by nearly 10% in the September 2022 quarter. However, during the same quarter, the Chinese equity markets represented by the MSCI China Index, is down by -23%. In short, this massive 33% (3,300 basis points) outperformance by the Indian equity markets is the biggest gap over China in any quarter since March 2000. Clearly, it does look like Beijing’s Covid Zero strategy and a string of regulatory crackdowns had not done good for investor sentiments. The tensions with Taiwan are only worsening matters.

In the last few quarters, China has forced the world into supply chain bottlenecks, held global manufacturing to ransom, sided with Russia and have tried to use its expansionist tendencies to threaten Taiwan. That is not too appealing to global companies as even the likes of Apple are now seriously diversifying beyond China and looking at India as a serious manufacturing option. These factors pulled together have led to a $5.1 trillion rout in Chinese stocks since the start of 2021. During this rather trying period, it is Indian economy that has shown resilience and the ability to bounce back from the depths of the pandemic.
Now, global fund managers are not just talking about India with fanciful epithets, but are actually putting their money where there mouth is. The globally acclaimed Mark Mobius has allocated a higher weight to India than China since the beginning of 2022. Large funds like Jupiter Asset Management have confirmed that many of its emerging market (EM) funds already had India as their largest holding. Even the likes of M&G Investments (Singapore) has made a much bigger allocation to India this year. It is the vast Indian market and the limited exposure of India to the global markets that fund managers are betting on.

There are a number of reasons investors are going slow on China. For starters, the anti-US stance adopted by China and their aggression in Taiwan and the South China Sea has not gone down well with the investor community Also, the draconian lockdowns announced by China are doing more harm than good; for its economic prospects and for its investment attractiveness. As FDI appears to be increasingly making a beeline for India over China, the FPI is just following the trend. Of course, India is still not a part of global bond indices and that could be a dampener, but equity fund managers are not overly worried about that. 

Much before the returns of India and China diverged so sharply in the Sep-22 quarter, the actual divergence began nearly 2 years ago in early 2021. In China, the tight liquidity conditions led to the unwinding of a 2-year rally in equities. On the other hand, India had maintained adequate liquidity and even in the midst of the rate tightening, the RBI has ensured that the markets were not starved for liquidity That enabled smart bull market in India in 2021. In the last 2 years since early 2021, Chinese markets saw market cap depletion of $5.1 trillion while Indian stock markets saw value accretion of $300 billion.

Ironically, there has been a negative correlation between Indian markets and Chinese markets since November 2021, which is the longest stretch on record. However, market veterans point out that these may still be early days and too early to call a trend. They feel that if India adopts a more sober approach towards world affairs, capital may rush back to China. But there appears to be consensus that Indian economy would grow faster than China for a sustained period of time, which is what fund managers are betting on. For now, that perspective appears to be favouring India, notwithstanding valuation differentials.