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As Indians prepare for Diwali shopping, foreign investors seem to be shifting their focus to a different market altogether – China’s stock market.
With foreign institutional investors (FIIs) pulling out over $11 billion (Rs 93,088 crore) from Indian equities as of October 2023, the big question is: Are global investors opting for Chinese stocks over Indian ones, similar to selecting Chinese crackers over Indian diyas this festive season?
The scale of this shift has even surprised seasoned market observers. “We’re seeing the largest monthly selloff on record since 2002,” says Gaurav Garg from Lemonn Markets Desk.
While typical concerns like valuations and Middle East tensions persist, China’s recent market stimulus has added an unexpected challenge for Indian stock markets.
China has recently introduced a series of stimulus measures, including easing monetary policies and boosting government spending, aimed at revitalising its slowing economy and attracting global investment back into its markets.
Think of it as a festive season sale, but in the Chinese stock market. China, after a long slump, has suddenly become the equivalent of a premium mall offering heavy discounts. The numbers tell a compelling story – nearly $19 billion of foreign money has rushed into Chinese markets in the past month, while investors pack their bags from India.
“China’s allure is undeniable; its massive market and growth potential make it a compelling bargain, like a “sale” that investors don’t want to miss,” Tarun Singh, Founder of Highbrow Securities, tells India Today.
Sujit Modi, CIO of Share.Market agrees. “These outflows can be majorly attributed to the ‘Buy China, Sell India’ narrative, which has gained traction owing to China’s recent monetary stimulus and lower market valuations,” says Modi, asserting that “the stimulus has made Chinese assets more attractive, making global investors optimistic and triggering a reallocation of capital”.
While the China factor has undeniably played a role in the outflow, market experts said it’s far from the only reason.
“China’s announcements may have sparked temporary excitement, but it’s oversimplifying to say investors are abandoning India for China,” Singh says, adding that “this ‘Buy China, Sell India’ narrative is misleading and unsustainable”.
Several factors, including high inflation, market overvaluation, the US presidential elections, and disappointing Q2 results, are contributing to the FII selloff, according to experts.
“There are several factors driving the record foreign outflows, ranging from valuation concerns and safe haven flows amid tense Middle East conditions to global investors rebalancing their portfolios towards China after stimulus announcements,” notes Gaurav Garg from Lemonn.
September saw inflation hit 5.49%—the highest this year—casting a shadow over market sentiment. Sujit Modi points out that this inflationary pressure, combined with disappointing earnings from several market heavyweights, has created what market experts call a perfect storm.
“The record FII outflows are driven by the shift towards China as well as the weakness in Indian indices due to rising inflation and underperformance by index heavyweights. India’s 5.49% retail inflation in September was the highest seen this year, which dampened investor sentiment,” Modi tells India Today.
The pain isn’t spread equally across the market. Four sectors in particular have borne the brunt of this foreign selling spree. “Financials, Autos, Energy, and IT remain particularly vulnerable,” notes Garg.
These sectors’ sensitivity stems from their heavy reliance on global investors and their exposure to macroeconomic factors like rising interest rates.
Amidst this seemingly gloomy scenario, a remarkable story of market resilience has emerged. Unlike previous episodes of foreign selling that typically triggered 10-15% market crashes, this time the Nifty has declined by only 5-6%.
The reason? India’s domestic investors have stepped up to the plate like never before.
“India’s reliance on foreign flows for market stability has lessened significantly,” Tarun Singh notes.
Domestic institutional investors have purchased over $8 billion worth of shares in October alone, nearly matching the foreign outflows. This newfound stability reflects a maturing market ecosystem where domestic participants increasingly hold the power to counter foreign selling pressures.
While the current market dynamics might seem concerning, market experts view this more as a tactical shift than a strategic exodus. “China still faces structural issues and the threat of new trade tensions with the West, especially if Trump wins the US election,” Garg points out.
He notes a telling statistic: India’s weight in the MSCI Emerging Markets index has grown from 9% in 2021 to about 20%, while China’s has decreased from 40% to 24%.
The coming months will test this resilience as markets navigate through a complex web of global factors.
The US election outcome, Middle East developments, and central bank policies will all play crucial roles in determining the direction of global capital flows.
Modi suggests that while certain sectors might face near-term pressure, India’s fundamental growth story remains compelling for long-term investors.
As the festival of lights approaches, it’s worth remembering that markets, like festivals, have their cycles. India’s expected GDP growth of 6-7% significantly outpaces China’s projected 4%, underlining the country’s stronger fundamental position.
“India is a solid macro growth story and remains the fastest growing major economy in the world. We still believe China remains more of a tactical call for global investors at this point, while India remains a structural growth story,” explains Garg.
Sujit Modi adds that the recent inflows into China could be seen as a short-term tactical move for investors looking to capitalise on the country’s stimulus measures, especially given the regulatory concerns and potential for slowing long-term growth in China.
“India, on the other hand, will be an attractive investment for global investors in the long term due to its potential for sustained growth. Therefore, while there is a major reallocation towards China, it is unlikely that this shift will sustain,” he asserts.
This situation may represent an opportunity for investors who understand that, like festivals, market cycles come and go, but solid fundamentals remain. While some may be lured by China’s current offers, India’s long-term investment prospects—supported by steady growth and ongoing reforms—still shine brightly.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)