India’s stocks have fallen by more than 3.5% over the past two weeks, with seven out of the past 10 trading days seeing losses for Indian equities, while Chinese stocks have risen almost daily. This raises the question of whether stellar returns in China have come at the cost of Indian equities. In the short term, some evidence links China’s gains to India’s losses.
Citi strategists observe that when significant outflows from China, there was a similar pickup in inflows to India. Chris Ma, head of Asia quantitative research at Citi, said that while fund flows are fungible and it’s difficult to attribute the direction of flows, they would not be surprised if investors begin taking profit from overweight India positions to fund closing China underweight positions. Bernstein’s Rupal Agarwal downgraded India to “Underweight” while maintaining an “Overweight” stance on China, saying that India’s market is quite vulnerable in the near term driven by record high relative valuations to China and Emerging Markets already showing signs of peak.
India’s stocks face short-term pressure
However, it’s unclear if further Chinese stimulus measures will continue to hurt Indian equities. JPMorgan’s equity strategist David Aserkoff warned that the rally may fizzle if the underlying economic environment remains challenging in China.
Even if China’s economy improves and its stock market soars, experts suggest it’s unlikely to significantly hurt the Indian equity market’s growth outlook over the long term. According to Wall Street observers, a strong and rapidly growing economy, along with a resilient domestic investor base, continues to be significant drivers of Indian stock markets. Morgan Stanley’s Jonathan Garner said this week in a note to clients, “The Indian market has numerous positive domestic drivers which underpin our overweight recommendation.
These include sustained high real and nominal GDP growth, earnings growth, and the best demographic underpinning for equities demand in our coverage.” Citi strategists echoed a similar view: “We remain constructive and would buy any dips.
