The Chinese stock market crisis could be positive for India as the country remains a long-term growth story while the recent uptick in the Chinese stock market is insufficient to offset the losses incurred over the past year, according to experts.
China's Shanghai Shenzhen CSI 300 index is down over 17 per cent over the past 12 months. The index had been in the red since August last year on a monthly scale. It was hovering near a five-year low before the recent rebound. However, for February so far, the index is up nearly 5 per cent.
CSI 1000 is down over 27 per cent over the last 12 months. It cracked 19 per cent last month but in February so far, it is up over 4 per cent. The recent gains in the indices came after Beijing took steps to stop the stock rout.
The collapse of the Chinese stock market has dealt a severe blow to foreign institutional investors who considered China a key investment hub. Real estate crisis, slow growth, deflation and demographic headwinds have worsened the outlook of the Chinese market.
Also Read: China Stock market Rout: 10 key factors influencing Chinese equities
What's wrong with the China stock market?
China is facing perhaps the most challenging time amid real estate woes, deflation, and demographic headwinds. While the stock markets in the US and India have been soaring, Chinese stocks have been plummeting.
"Stock market prices are a reflection of the deep-seated problems with the economy and corporate protests. Falling stock prices and plunging indices are the symptom rather than the cause," said Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities.
Also Read: A Stock Bailout Won’t Solve China’s Troubles
While the Chinese government has been trying to stop the stock market crash, the government's steps are unlikely to give a boost to the stock market unless fundamental problems of the economy are addressed.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services pointed out that the Chinese market’s underperformance has been stark for many years now.
"In early 2010, the Shanghai Composite Index was around 3000. Now it is below that level at around 2865. No return during the last 14 years. In sharp contrast, Nifty was around 5,000 in early 2010 and is now above 21,500, multiplying more than four times during 14 years. This contrast in performance is reflected in the valuations too. While Nifty is trading at above 21 times the estimated FY24 earnings, Shanghai Composite is trading at only 11.5 times," said Vijayakumar.
Does it mean more inflow to India?
Experts are positive about the Indian economy as they believe India is a long-term structural growth story and continues to remain an attractive destination for investors with long-term views.
Vakil observed that India's GDP in the current fiscal is expected to grow at 7.2 per cent in real terms and close to 9-10 per cent in nominal terms. India is likely to grow at least twice as fast as its rival.
"Chinese stocks are unlikely to attract large flows and that is a clear positive for the Indian markets. Moreover, India’s weight in a popular emerging market index has doubled from 9 per cent as of December 2020 to 18 per cent as of January 2024 and in the same period, China’s weight has fallen from 39.1 per cent to 24.9 per cent. It is evident from these numbers that passive institutional flow mimicking this index is increasing their exposure to India compared to China. This trend is unlikely to reverse soon," said Vakil.
Vakil pointed out that after the fall, Chinese indices are trading at a very cheap valuation while Indian markets are trading upper end of their long-term range. If Beijing is successful in communicating change in its attitude towards internet companies and shows some signs of mending its broader economic woes, many active value investors may choose to put some money fresh money in China and even pull out some from India, though we have not seen any sustainable sign of the same.
Vijayakumar said the Chinese economy is going through difficult times with sharply slowing growth, rising unemployment and the real estate market in serious crisis. India will certainly attract more capital flows. The concern is the high valuation in India.
Alok Agarwal, Head Quant & Portfolio Manager at Alchemy Capital Management is of the view that if significant emerging market (EM) funds continue to pull out, China’s equity risk could prolong stagnation.
Agarwal underscored that the top EM funds' average holdings of Chinese stocks have fallen to a five-year low, and very few have increased their positions.
With the outlook continuing to be strong for India, Agarwal expects India to attract more money on its own merits, but China’s failures would only add fuel to the fire.
"In the MSCI Emerging Markets Index, India has the second-largest country weight (18 per cent), behind China (23 per cent). India's weight was 8 per cent five years ago, while China's was 31 per cent. India, on the other hand, has been performing extremely well, as evidenced by the country's market, corporate earnings, and macro growth. Over the past year, MSCI China has declined by 25 per cent, while MSCI India has increased by 31 per cent. The figures for the previous five years are -28 per cent and +116 per cent, respectively (according to Bloomberg)," Agarwal pointed out.
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First Published:
12 Feb 2024, 06:11 PM IST
