Will the current reopening of Chinese economy end India’s outperformance?

India’s stock market remained flat in dollar terms compared to a year and a half ago, when its economy was starting to reopen after a devastating rise in the delta option. However, its weight in the MSCI Emerging Markets Index has risen to second place, ahead of Taiwan and South Korea, and almost all of the gains have come from the index’s largest component: China.

The world’s second-largest economy has seen shares fall by two-fifths since June 2021, thanks to Beijing’s divisive Covid-19 policies, real estate turmoil and a punitive antitrust campaign against the country’s most valuable technology companies. If China is drowning in pessimism, it is the opposite in India. Thanks to increased urban demand after the pandemic, stocks have held up well despite aggressive monetary tightening by the US Federal Reserve.

As a result, while China’s share in the MSCI EM declined to 28%, from 35% in May 2021, India’s share rose from 10% to 15%.

Will China’s current economic recovery put an end to India’s success? This will be the question for global investors in 2023.

If the experience of other countries is any guide, the shift from zero infection to allowing the virus to spread through communities would be chaotic and potentially deadly for China’s elderly, only 40% of whom have strong immunizations. However, a tight transition could help lift consumer and business sentiment from record lows, shake the property market out of its slumber and accelerate car sales. This could also lead analysts to raise their earnings growth forecast to 4% over the next 12 months. Before the pandemic, these expectations were 17%.

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In India, the pain of Covid-19 – and the benefits of reopening – are both in the rearview mirror. The economy is now losing momentum even though the market remains a bubble. Even with caution in estimates due to inflation (harming margins for domestic consumer companies) and the global slowdown (affecting software exporters), the consensus expectation for revenue growth over the next 12 months is 18%. Optimism is highest in banks. They benefit from higher business volumes as well as higher pricing: Rising commodity prices have boosted demand for working capital loans even as rising rates have pushed up interest margins.

The case for a slight rotation from Indian stocks to China is already getting stronger. BNP Paribas recently downgraded India from “overweight” to “neutral”, removing the country’s consumer staples from its model portfolio and reducing exposure to software exporters. “Our tactical caution on India stems from relative market valuations and the possibility of remittances to North Asia as China opens up,” said Manish Raichaudhuri, BNP’s head of Asia research. The consensus view on India’s consumption-oriented stocks is likely too optimistic, while the federal government’s budget – the last before the 2024 elections – could introduce additional volatility, he adds.


In the long term, India is trying to increase its investment attractiveness by emerging as an alternative to China. With President Xi Jinping’s policies exacerbating tensions with the West, Prime Minister Narendra Modi is positioning his country as a multinational destination to reduce its excessive influence on Chinese supply chains.

There’s no guarantee that the game, backed by $24 billion in subsidies for manufacturers, will work. As Arvind Subramanian, an economic adviser to the Modi administration until 2018, and Josh Fellman, a former Delhi-based International Monetary Fund fellow, noted in a recent Foreign Affairs op-ed: “India faces three major obstacles in its quest to become the ‘next.’” China; ‘ the investment risks are too great, the political internals too strong, and the macroeconomic imbalances too great.”

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Other countries may also have a claim. Vietnam, which is more open to trade than India, wants to drop Britain from this year’s list of the US’s seven biggest trading partners. As of 2019, Southeast Asia’s manufacturing power was not even among the top 15. Moreover, no matter how inviting New Delhi’s policies are on paper, there is no absolute certainty that they will be implemented impartially and not manipulated to favor national heroes. giant Indian conglomerates favored by the government, according to Subramanian and Felman.

Only companies controlled by Gautam Adani, India’s richest businessman, will account for a third of the 33% jump in local currency from 2021 in the BSE 500, a broad index of the country’s largest companies. Throw in Mukesh Ambani’s rival petrochemicals telecom empire and half the gains are claimed by the two richest men.

So far, however, the increased concentration of wealth has worked well for local investors – they are neither overly skeptical of their country’s fate nor its direction. This is due to the fact that their prosperity depends on the same clause of the pro-capitalist policy. Four years ago, India’s largest companies had a combined pre-tax income of 7 trillion rupees ($85 billion), of which nearly a third was the treasury. Now the pre-tax profit has reached 13 trillion rupees, but the share of the state has decreased by almost a quarter. The relative importance of indirect taxes, including for oil products, has increased.

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This does not bode well for India’s poor, who have been hit harder than the rich by consumption taxes, especially in an inflationary environment. But to the extent that the tax burden on companies is light, the stock market is unlikely to challenge the absence of appreciable purchasing power outside of a tiny, wealthy class. India’s wage economy has become a profitable enterprise and domestic investors seem to be doing well with it. According to Crisil, a subsidiary of S&P Global Inc., over five years, India’s managed investments — life insurance, mutual funds, retirement accounts, hedge funds and portfolio services — have grown from 41% to 57% of gross domestic product. as revenue reaches more cities and smaller towns, it may not take long for the $1.6 trillion industry to reach $2 trillion in steady bank deposits.

With net outflows of more than $187 billion, the outflow of global investors from China this year has been far more brutal than the $17 billion they pulled out of India. When China reopens, they have to spend more money in the People’s Republic. Even if some of these funds come from India, it should be remembered that the rapidly growing pool of local institutional liquidity is crowding out the influence of foreign fund managers. Until India Inc. provides reasonable income growth, foreigners cannot ignore a country where a growing domestic investment class has come to worship profits.


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