In the ongoing battle between India and China for dominance in Asian equity markets, recent stimulus measures from China have led many analysts to adjust their investment strategies. Brokerages have begun to tactically shift their focus toward China, suggesting that the country offers a better risk-reward ratio and return potential in the short-to-medium term compared to India. This repositioning comes amid concerns over India’s relatively high valuations and potential slowing growth indicators.
China’s Stimulus Boosts Investor Sentiment
China’s recent economic stimulus measures have reignited optimism among global investors. According to a survey by BofA Securities conducted between October 4 and October 10, 2024, 48% of investors now expect stronger Chinese economic growth, the most positive sentiment since April 2023. This outlook has led many fund managers to increase their weightings in Chinese equities, reversing previous bearish positions on the country.
The same survey revealed that 14% of investors considered “long China equities” to be one of the most crowded trades, second only to “long gold” at 17%. This renewed interest in China reflects a significant change in sentiment as global investors bet on a recovery in the world’s second-largest economy.
Elara Securities: Potential Outflow from Indian Markets
Elara Securities, in its October fund-level analysis, pointed out a total shortage of $32 billion in China’s equity market, approximately 3.5% of assets under management (AUM) within the top 450 global emerging market (GEM) funds. Elara estimates that with India holding a 20% weight in these funds, a potential shift toward China could result in $6 billion of outflows from Indian equities. This is likely to cause a short-term adjustment in Indian markets as foreign institutional investors (FIIs) reallocate their capital.
How Leading Brokerages are Positioning Across Asian Equities
Here’s how prominent brokerages are interpreting the developments in China and their current stance on India versus China in the Asian and emerging market landscape:
Macquarie: Short-Term Tactical Shift Toward China
Macquarie notes that several global emerging market (GEM) fund managers who were underweight China have significantly increased their exposure in the past few weeks. While the long-term outlook on China remains uncertain, fund managers are opting not to “swim against the tide” and are tactically increasing their positions. Macquarie highlights that many of these managers are trimming their overweight positions in Indian equities and reallocating to China.
In the long term, however, Macquarie remains more constructive on India, citing stronger economic fundamentals. Despite this, there are short-term concerns about India’s growth prospects, including slowing auto sales, declining tax collections, and weak credit growth, which have prompted a temporary shift in sentiment.
Jefferies: Caution on China’s Boom-Bust Cycle
Jefferies acknowledges that the Chinese government’s stimulus measures have succeeded in boosting market expectations. The recent broad-based rally in Chinese stocks has led some investors to fear missing out, especially those managing against Asia and emerging market benchmarks. However, Jefferies warns that these rallies often resemble boom-bust cycles, and previous concerns about China’s long-term structural issues remain.
Jefferies cautions that while there are short-term gains to be made, investors should be wary of the indiscriminate buying that often accompanies such rallies. The brokerage is cautious in its positioning, keeping an eye on China’s broader economic health.
Morgan Stanley: A Measured Approach
Morgan Stanley remains cautiously optimistic about China’s near-term prospects. The Chinese government’s commitment to expanding fiscal deficits has helped stabilize market sentiment, but Morgan Stanley expects further fiscal measures to be incremental, with the full impact likely seen in 2025.
The brokerage believes that while Chinese equities offer attractive opportunities in the short term, the long-term growth outlook remains clouded by structural economic challenges. Morgan Stanley advises investors to remain selective in their stock picks, focusing on earnings visibility and quality.
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BofA Securities: Shift from India to China
According to BofA Securities, Japan continues to be the favorite market in the Asia-Pacific region, followed by Taiwan. However, the recent improvement in sentiment toward China has come at the expense of India, where the gap in allocations is narrowing. Investors are becoming more cautious on India due to its relatively expensive valuations compared to China, which now presents a more favorable risk-reward ratio.
Elara Securities: Short-Term Optimism, Long-Term Skepticism on China
Elara Securities takes a balanced view on China. While the brokerage sees tactical opportunities in Chinese equities over the next three to six months, it remains skeptical about the long-term sustainability of the rally. Elara warns that China’s domestic economy continues to face significant challenges, including weak consumer confidence, a struggling property market, and potential export growth constraints due to tariff hikes by the U.S., Canada, and the EU.
Elara also points out that China’s reliance on its export-led growth model may falter, particularly with Germany’s recession further threatening demand for Chinese goods.
Conclusion: Tactical Shifts in a Changing Landscape
As China’s stimulus measures begin to take effect, leading brokerages are tactically shifting their positions, favoring Chinese equities over Indian markets in the short term. While India remains a long-term favorite for many investors, the current risk-reward dynamics have prompted a recalibration of portfolios. However, the long-term structural challenges in China suggest that this repositioning may only be temporary, with India expected to regain favor as growth concerns subside.
For investors, the key lies in balancing short-term opportunities in China with the longer-term potential in India, keeping a close eye on economic and policy developments across both markets.
