This report is from this week's CNBC Inside India newsletter, bringing you up-to-date, insightful news and market commentary on the emerging powerhouse and the major companies behind its meteoric rise. Do you like what you see? You can register here.
The big story
The investment world has quickly swapped its trappings in recent weeks. But this is justified if one's loyalty is based solely on investment returns.
China appears to have become the preferred investment destination for market participants after Beijing unveiled its most aggressive monetary stimulus package since the coronavirus pandemic while supporting the struggling real estate market.
China's CSI 300 index has increased by about 25% since the stimulus measures were announced. Meanwhile India Fancy 50 has fallen by more than 3.5%. Seven of the last 10 trading days have been losses for Indian stocks, while Chinese stocks have risen in every day but one, according to CNBC's count.
The causal link between the two stock markets over the past two weeks raises questions about whether India's stellar returns have come at the expense of falling Chinese asset prices over the past four years. More importantly, could this reverse in the near future?
In the short term, there appears to be evidence that China's gains are linked to India's losses. Citi strategists observe cautiously: “When there were significant outflows from China, we saw a similar increase in inflows to India.”
“While fund flows are fungible and it is difficult to attribute the direction of flows, we would not be surprised if investors began taking profits on overweight positions in India to fund the closing of underweight positions in China,” said Chris Ma, Head of Quantitative Research in Asia at Citi.
Additionally, Berstein's Rupal Agarwal downgraded India to “Underweight” but maintained the investment bank's “Overweight” position on China, saying, “On India, we were neutral but now we think the market is quite vulnerable in the near term.” “driven by record high relative valuations to China and emerging markets (which are already showing signs of peaking).”
Could there be further problems for Indian equity investors if more of the rumored stimulus measures are confirmed? That would depend on whether the announced measures are likely to target the Chinese stock market or the real economy.
Although stimulus measures have boosted stock prices so far, JPMorgan equity strategist David Aserkoff cautioned investors that the rally could have its Wile E. Coyote moment if the underlying economic environment remains challenging.
“The problem for [Central and Eastern Europe, the Middle East, and Africa] Equities: If these new/improved swap facilities only boost Chinese equity purchases and the stimulus does not boost Chinese economic growth, then what is the upside potential for CEEMEA equity markets? “We don’t see it,” Aserkoff said the day after the stimulus measures were announced.
Similarly, Morgan Stanley strategists expect the MSCI China index to likely remain in a “range” in the second half of the year unless further policy measures are announced.
Even if China's economy recovers and the stock market booms, it is unlikely to hurt the Indian stock market's growth prospects in the long run, experts say.
For now, a strong and fast-growing economy and a “resilient” domestic investor base continue to be key drivers for Indian stock markets, according to Wall Street watchers.
“The Indian market has numerous positive domestic drivers that support our overweight recommendation,” Morgan Stanley's Jonathan Garner said in a note to clients this week. “This includes continued high real and nominal GDP growth and earnings growth, as well as the best demographic basis for equity demand in our reporting.”
Citi strategists also shared a similar view, adding: “We remain constructive and would buy any dip.”
—CNBC's Michael Bloom contributed reporting.
Must know
Ratan Tata dies at the age of 86. Tributes to Tata were plentiful, from Indian Prime Minister Narendra Modi to Reliance Industries Chairman Mukesh Ambani to Google CEO Sundar Pichai. Tata Sons, the parent company of the Tata Group, includes nearly 100 companies operating in industries such as commercial aviation, steel production and automobile manufacturing. Tata, who retired as group chairman in 2012, is responsible for leading over 60 global acquisitions. News of the death was first confirmed by Tata Sons Chairman N. Chandrasekaran, who did not reveal the cause of death.
Over 10,000 complaints for Ola. India's central consumer watchdog sent a show cause notice, an official document seeking an explanation, to Ola Electric after receiving around 10,000 complaints against the electric scooter maker. Issues raised included substandard customer service and inaccurate invoices. Shares of Ola Electric have fallen around 40% from their peak about two weeks after the company's listing.
Fourth country reaches foreign exchange reserves of $700 billion. India's foreign exchange reserves rose by $12.6 billion in the week ended September 27, according to the Reserve Bank of India. This brings its total reserves to $705 billion, behind only China, Japan and Switzerland. The RBI “seems to be relaxed about holding larger foreign exchange reserves as it wants to build buffers against possible external risks,” BofA Securities wrote.
Green growth alone requires $1 trillion. India's growth aspirations cannot rely on regular economic expansion, said Zarin Daruwala, CEO of Standard Chartered Bank, India & South Asia. The country also needs to focus on environmentally sustainable development, which will require $1 trillion over the next decade. However, private sector investment has not increased as much as desired. “Today, India accounts for just 1% of the global green bond market,” Daruwala said.
What happened in the markets?
Indian stocks were flat this week, a significant improvement from last week's loss of 4.5%. The Nifty 50 index closed at just under 25,000 points and is up 15% this year.
The benchmark 10-year Indian government bond yield fell to 6.76% after rising more than 20 basis points last week.
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This week on CNBC television, Young Liu, chairman of Hon Hai Technology Group (also known as Foxconn), said that Foxconn's manufacturing in India has the potential to grow strongly in the coming years. Although India's supply chain is still being developed, “they will eventually have their own supply chain,” Liu said, “just like China.” The current government is very pro-business and pro-industry, Liu added.
Meanwhile, the Indian market is “purely a fundamentals story,” said James Thom, senior investment director at Abrdn. That's in contrast to the Chinese market, which is driven more by sentiment than fundamentals, he said. “We've seen robust economic growth reflected in earnings growth,” Thom told CNBC. Although valuations of Indian equities are high, Thom does not believe there will be a significant downgrade as “fundamentally the performance is very solid.”
What happens next week?
Inflation reports from the US, UK and India will dominate investors' attention next week. Meanwhile, civil engineering firm Garuda Construction and Engineering will go public on Tuesday.
October 11: US Producer Price Index for September, UK GDP, JPMorgan Chase and Wells Fargo earnings
October 14: Indian Consumer Price Index for September
October 15: Garuda Construction and Engineering IPO, gains for Bank of America, Goldman Sachs and Citigroup
October 16: British consumer price index, profit for Morgan Stanley
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