As China reopens, will investors continue to ‘Sell India, Buy China’- Here’s how both markets moved recently

As China reopens, will investors continue to ‘Sell India, Buy China’? Here’s how both markets moved recently

The reopening of China’s economy, with the government relaxing measures and preparing to reopen Hong Kong’s border, could spell trouble for India’s capital markets as investors move increasingly to the land of the dragon. In the FTSE Emerging Index, India has a weight of around 17-18%, while China is twice the weight at above 35%. In the middle of the last year 2022, China’s weight in the index fell to below 30%, as the country dealt with geopolitical tensions and Covid lockdowns. At the same time, India’s weight in the index jumped from 16.91% to 19.49%, as foreign investors flocked due to strong economic fundamentals and steady post-pandemic recovery. India stood out as a preferred investment destination at the time.However, with China markets reopening, will India no longer remain the desired investment destination for foreign investors?China risk for India markets, but domestic strength at play

Last year, in the MSCI Emerging Markets Index, India zoomed past Taiwan and South Korea to second place. Almost the entire gain came at the expense of the gauge’s biggest constituent China, which saw its equity indices slump amid Beijing’s isolationist Covid-19 policies, turmoil in the real estate industry, and a punishing antitrust campaign against the country’s valuable tech companies. China is now emerging from stringent lockdowns, and the reopening of the economy could take the first quarter of this year. While this is a risk for India, analysts believe that India will still remain attractive, given that inflation has started to come off, and no real major quantitative tightening has happened.

Hong Kong’s loss, India’s gain; China’s gain, India’s loss

Jul-Oct 2022China weight: Fell to 29.27 from 34.81Hang Seng: Fell 27%India weight: Rose to 19.49 from 16.91NSE Nifty 50: Rose 5%

December 2022China weight: Rose to 35.03%Hang Seng: Rose 5.5%India weight: Fell to 17.20%NSE Nifty 50: Fell 3.7%

While China is slowly trying to open up the economy, it will not be a smooth ride, according to IMF Managing Director Kristalina Georgieva. “For the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative,” she said. In October’s forecast, the IMF pegged Chinese GDP growth last year at 3.2%, on par with the fund’s global outlook for 2022.

Is ‘Sell India, Buy China’ here to stay?

Experts believe that the pain of Covid-19 in India, and the gains from reopening are both in the rearview mirror now. Amid such a scenario, the case for some rotation away from Indian to Chinese stocks is already firming up. This can be seen from the fact that China’s weight in the FTSE Emerging index rose to 35.03% in December 2022, while that of India fell to 17.20%. BNP Paribas recently downgraded India to “neutral” from “overweight” by removing the country’s consumer-staples stocks from its model portfolio and pruning exposure to software exporters.

However, Harendra Kumar, Managing Director, Elara Securities believes that 2023 is the year when there will be a decisive pivot of foreign investors to India from China. “While the narrative is dominated by China’s re-opening trade, in my view it is a myopic strategy and will be a costly misstep,” he was quoted saying in an interview. According to Kumar, the construct of the Chinese economy has been permanently impaired. The historical correlations are broken and are not likely to follow historical patterns going forward. On the other hand, India’s strides have been structural and, as India becomes a dominant and liquid market, flows will chase size and performance.

(The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)