Opinion: India and China – A Tale of Two Markets in 2023

The Indian stock market remains unchanged in dollar terms compared to a year and a half ago when the economy was just beginning to reopen after a devastating surge in the delta variant. Still, its weight in the MSCI Emerging Markets Index overtook Taiwan and South Korea to take second place, with almost all of the gain coming at the expense of China, the largest component of the gauge.

In Beijing, the world’s second-largest economy, stocks have fallen by two-fifths since June 2021. This is thanks to Beijing’s isolationist Covid-19 policies, turmoil in the real estate industry, and punitive antitrust campaigns against the country’s worthy tech companies. If China is pessimistic, India is the opposite. Stocks have held up pretty well despite aggressive monetary tightening by the US Federal Reserve, thanks to stagnant urban demand after the pandemic.

As a result, MSCI EM’s China share fell to 28% from 35% in May 2021, while India’s share rose from 10% to 15%.

Will the current reopening of the Chinese economy put an end to India’s outperformance? This will be a question for global investors in 2023.

If the experience of other countries is any guide, the reorientation from zero infections to spreading the virus in the community has been chaotic and probably lethal as only 40% of the elderly in China have received a booster dose. will be targeted. However, a decisive shift could help pull consumer and business sentiment away from record lows, pull the property market out of the doldrums and boost car sales. That could cause the analyst to raise his forecast of 4% earnings growth over the next 12 months. Before the pandemic, those expectations were 17% for him.

In India, both the pain of Covid-19 and the benefits of reopening are in the rearview mirror. Markets continue to bubble, but the economy is currently losing momentum. Some caution in estimates due to high inflation (hitting local consumer goods margins) and a global economic slowdown (affecting software exporters) Nonetheless, the consensus expectation is an 18% increase in earnings over the next 12 months. Optimism is highest among banks. They benefit from increased trading volumes and superior pricing. Higher commodity prices are boosting demand for working capital loans, even as rising interest rates have strengthened margins.

The prospect of a rotation from Indian to Chinese stocks is already increasing. BNP Paribas recently downgraded India from ‘overweight’ to ‘neutral’ by removing major Indian consumer goods stocks from its model portfolio and reducing its exposure to software exporters. Manishi Raichaudhuri, BNP’s head of research in Asia, said: “The tactical attention to India stems from the market’s very high relative valuation and the potential redistribution of funds to North Asia as China reopens. The consensus opinion on India’s consumer-oriented stocks is perhaps too optimistic, but the federal budget (the last one before the 2024 elections) could bring further volatility, he added.

Longer term, India is looking to strengthen its investment attractiveness by emerging as an alternative to China. As President Xi Jinping’s policies exacerbate rifts with the West, Prime Minister Narendra Modi is touting his country as a destination for multinationals to reduce their overexposure to China’s supply chains.

There are no guarantees that the gamble backed by $24 billion in subsidies for manufacturers will pay off. His Arvind Subramanian, who served as economic adviser to the Modi government until 2018, and Josh Felman, a former employee of the International Monetary Fund in New Delhi, said in his recent Foreign Affairs article: China;’ investment risks are too great, policies too inward-looking, and macroeconomic imbalances too great. ”

Other countries may also claim. Vietnam, which is more open to trade than India, is on the verge of overtaking Britain on her list of seven biggest trading partners for the US this year. Southeast Asia’s manufacturing powerhouse didn’t even make the top 15 until 2019. Moreover, no matter how attractive New Delhi’s policies may be, there is no certainty that they will be implemented fairly and not tweaked to benefit the country’s champions. A huge government-backed Indian conglomerate, according to Subramanian and Felman.

Companies run by India’s richest businessman Gautam Adani alone account for a third of the 33% rise in the BSE 500, a broad measure of India’s largest companies, from 2021 onwards. I’m here. Throw in rival Mukesh Ambani’s telecoms-to-petrochemical empire, and half of the profits are told by the two richest tycoons.

But so far, the growing concentration of wealth seems to be working well for local investors. They are neither skeptical of their country’s fate nor critical of its direction. Four years ago, India’s biggest corporations combined made him Rs 7 trillion ($85 billion) in pre-tax profits, of which the Ministry of Finance accounted for almost a third of his. Now pre-tax profits have increased to 13 trillion rupees, while the government’s share has fallen by about a quarter. The relative importance of indirect taxes, including petroleum products, is increasing.

This is not a great result for India’s poor, especially in an inflationary environment, who are hit harder than the rich by taxing consumption. But as long as the burden of taxation on businesses is light, the stock market is unlikely to question the absence of meaningful purchasing power beyond the wealthy few.India’s wage-driven economy is profit-driven company, and domestic investors seem to accept it. In five years, managed investments (life insurance, mutual funds, retirement accounts, hedge funds, portfolio services) in India increased from 41% to 57% of gross domestic product, according to Crisil, an affiliate of S&P Global Inc. I grew up. As the quest for yield extends to smaller cities and towns, it may not take long for the $1.6 trillion industry to catch up to his $2 trillion in bank time deposits.

With more than $187 billion in net outflows, global investors’ exit from China this year was far more brutal than the $17 billion they pulled out of India. As China reopens, they will put more money into the People’s Republic. Remember, even if some of these funds are funded at Indian expense, the rapidly expanding pool of domestic institutional liquidity has weakened the influence of overseas fund managers. It is important to keep As long as India Inc. has reasonable revenue growth, foreigners cannot afford to ignore a country where an increasingly strong domestic investment class has come to worship profit.