Daily Management Review

Global Investors Continue To Favour China Over “Overvalued” India


Global Investors Continue To Favour China Over “Overvalued” India
In a shift in the two largest emerging markets, investors with billions of dollars in their portfolios are gradually beginning to favour China over India and reverse the trend of the past year that has pushed markets in opposite direction.
BlackRock Inc. has upgraded Chinese stocks as the policy hurdles decrease, saying "the time to position in China is now," while reducing its exposure Indian equity markets. Goldman Sachs Group Inc. and Nomura Holdings Inc. both reduced their ratings on Indian stocks in the last few days, with the latter increasing its offshore Chinese stocks simultaneously.
The main reason for this is valuations because the losses caused by China's extensive enforcement of regulations have left Chinese equity markets relatively inexpensive and shares of China's South Asian nation appear expensive after a world-leading market.
It is reported that the MSCI China Index is trading less than 13 times its one-year forward earnings estimates , while its Indian counterpart has a multiple of 22. This puts the gap at two standard deviations higher than the average of the past decade. The Chinese index has been performing better since the close of September following six consecutive quarters of subpar performance.
“There is more opportunity to allocate to China as the performance disparity between the two countries is one of the largest on record,” said Tom Masi, a New York-based portfolio manager with GW&K Investment Management LLC, who recently trimmed his India positions.
The move towards China comes amid increasing optimism that its ailing equities have taken into account the most severe effects of Beijing's tightening that , in its most extreme form, has wiped off up to $1.5 trillion worth of value. But the slowdown in economic growth and an escalating property market crisis are just two of the reasons that make being bullish on China an extremely risky decision.
The world's biggest investment manager, this optimism comes from the belief that the monetary policy of China will likely to be more accommodative next year , and the growth may be more robust than anticipated, Lucy Liu, BlackRock's portfolio manager for emerging markets equities, stated in a recent briefing.
BlackRock changed its position in China to a neutral position from an underweight and also trimmed its call for underweight on companies that provide internet services. In the meantime, it has booked some gains from Indian shares.
Sell-side analysts appear to be in agreement. According to them, the MSCI China Index is seen increasing 39% over next 12 months, while the Indian equivalent is believed to be less than half the potential upside according to analyst estimates that were compiled by Bloomberg. It's easy to see the logic behind their numbers that the China index has trailed the Indian one by more than 40% this year, which is expected to be the largest since 1999.
Indian stocks that nearly doubled since March 2020's lows thanks to record low interest rates and a booming retail investing market has slowed down in recent months. This is due to concerns about increasing liquidity and increasing inflation across one of world's largest oil-importing nations.
The mood about new listings has also cooled due to the fact that digital payments startup Paytm, the country's biggest Initial Public Offering, failed during its initial public offering due to concerns about the high cost of valuations. Foreign money is also trading and have withdrawn $1.3 billion in the quarter, in contrast to the flows of $8.5 billion during the initial nine months in 2021.
“There may be a valuation correction in the short-term as India wrestles with higher energy prices,” said GW&K Investment’s Masi. “The failure of Paytm is an early indication of the limits of valuation.”