[ad_1]
 "India China, India, China")
India China, India, China (Photo: Shutterstock)
Developments in recent weeks – geopolitical conflict in West Asia that triggered an 18 percent rise in crude oil prices to around $80 per barrel within days, stimulus measures announced by China to support its economy and high valuation Indian oil. markets (23x forward year-on-year earnings) – saw foreign portfolio investors (FPIs) dump Indian stocks worth over Rs 30,000 crore in the first four trading days of October.
Given this, some experts suggest that investors should avoid investing in Indian stock markets and instead look towards Chinese stocks from a short to medium term perspective. However, they expect the underperformance of Indian stocks relative to their Chinese counterparts to be short-lived.
“With renewed interest in Chinese stocks following recently announced monetary and liquidity measures and market expectations for more fiscal stimulus to come, there is a growing risk of near-term underperformance of Indian stocks “However, this period will not last long, as India’s structural story remains quite attractive,” Nomura analysts wrote in a recent report. .
Experts at BCA Research, a Canada-based research firm, on the other hand, suggest that absolute return investors are avoiding Indian markets amid recent developments, particularly Chinese stimulus measures. Foreign investors in the coming months, they said, will likely shift to Chinese markets at the expense of Indian markets, given recent significant stimulus measures by Chinese authorities and the depressed level of that stock market.
“Portfolios dedicated to emerging market (EM) and emerging Asia equities are expected to downgrade India’s rating from neutral to underweight. Stick to the relative stock trade we recommended last week: sell Indian stocks/buy China A-shares,” wrote Arthur Budaghyan, chief EM/China strategist at BCA Research in a recent co-note. written.
According to BCA Research, credit deceleration and fiscal tightening point to an imminent slowdown in India’s economic growth. Fiscal spending, excluding interest, is contracting rapidly in nominal terms. Both drivers of stock prices – earnings and (earnings) multiples – are falling in India at a time when equity valuations are at an all-time high, the research house warns.
“The credit impulse has become negative. This will limit both household spending and business investment growth. Indian corporate profits will slow further as restrictive monetary and fiscal policies continue to weigh on corporate growth and profit margins,” Budaghyan said.
Valuation problems
In terms of valuation too, Indian stocks, Budaghyan said, are currently overvalued by two standard deviations compared to their own history. Compared to their emerging peers, they are overvalued by 1.5 standard deviations.
“Extreme valuations make this stock market (Indian stocks) very vulnerable to a sell-off, which can be caused by any global or domestic trigger. Even a moderate earnings disappointment could lead to a significant decline in stock prices,” BCA Research said.
According to Macquarie, the narrative on China is changing after recent stimulus measures, and it will be difficult for global investors to ignore Chinese markets. China as an asset class, like other emerging markets, has historically been and still remains a macroeconomic asset class and will need further cuts from the US Fed to maintain momentum.
From a stock market perspective, as China recovers, Macquarie believes pressure on India will increase, particularly given its slowing economy and high valuations. In this context, liquidity will be “sucked up”.
“Investors are giving the benefit of the doubt about China’s ability to do the right thing. But it won’t be easy, as the problem is demand rather than supply of money, and more radical policies risk going against political and social commitments. Long term, we are still more comfortable with India’s secular outlook than China’s struggle with high savings rates,” said Viktor Shvets, head of global office strategy at Macquarie Capital.
First publication: October 8, 2024 | 10:26 a.m. STI