In recent sessions, the Chinese stock market has seen a significant rally, surpassing global indices due to a surge in investor demand, largely fueled by the government’s extensive stimulus measures. The CSI 300 index, which had experienced a severe 45% decline from its peak in 2021 to mid-September, has rebounded impressively, gaining over 20% and entering a technical bull market. Last week’s rally, in particular, was the largest one-week gain for the index since 2008, signaling renewed investor confidence.
This recovery in Chinese equities can be attributed to several policy interventions, including interest rate cuts and fiscal stimulus packages aimed at stabilizing the country’s economy and bolstering market confidence. As a result, both domestic and foreign investors have been drawn back to what was one of the world’s most battered markets, sparking renewed optimism about China’s economic prospects.
Investor reallocation and portfolio shift to China?
With the Chinese market’s resurgence, there has been growing speculation that investors may reallocate their portfolios toward China. Valuations in China are currently much more attractive compared to India, making the former a more enticing destination for those seeking higher returns. As China’s economy shows signs of recovery, there is also debate over whether global companies, many of which had relocated operations to other countries, including India, may reconsider shifting back to China.
Some analysts believe that if China’s recovery is sustained, it could present a competitive challenge for India. Global companies might reassess their investment and operational strategies, potentially slowing down or reversing shifts that have favored India as a rising economic hub.
Minimal impact on India’s economy
However, a recent report by Kotak Institutional Equities (KIE) downplays the impact of China’s market rally and economic recovery on India. The brokerage firm stated that while China’s market has gained traction, the Indian economy is unlikely to be significantly affected. KIE expects India’s exports to China to remain stable without any major changes, and imports are anticipated to continue as usual. Additionally, if China’s oil demand rises, it is likely to be balanced by increased oil production from OPEC+ and non-OPEC countries, particularly Saudi Arabia, which has expressed willingness to ramp up production.
KIE also highlighted that while some Indian metal companies might benefit from China’s recovery, any substantial earnings upgrades would depend on the extent and duration of China’s economic rebound, which, at present, remains fragile.
Impact on FPI flows to India
Foreign Portfolio Investment (FPI) flows to India have been robust in recent months, but the ongoing Chinese market rally could potentially moderate these inflows. According to KIE, if China’s rally continues, some active FPIs, especially those focused on Global Emerging Markets (GEM), might shift incremental funds to China, attracted by the country’s low valuations and the potential for sustained growth.
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Nevertheless, KIE believes that a large-scale reallocation of funds from India to China is unlikely. Active FPIs are not expected to significantly reduce their Indian holdings in favor of Chinese investments. Similarly, passive inflows, including those from GEM Exchange-Traded Funds (ETFs), may experience some moderation, but any changes in country weights in benchmark indices are expected to impact only incremental flows, rather than cause a major shift.
Domestic sentiment drives Indian markets
Despite the rally in Chinese markets, KIE noted that India’s domestic market is largely driven by local sentiment and inflows. Non-institutional investors in India have shown resilience and continue to adopt a price-insensitive buying strategy. Many remain optimistic about high market returns, buoyed by positive trailing returns. As long as this bullish sentiment persists, domestic investors are expected to maintain strong buying activity, irrespective of global developments.
Additionally, institutional investors, particularly mutual funds, are compelled to invest incoming funds into the market, regardless of valuation concerns. This environment has led to a scenario where valuations have become less significant, as institutional investors are required to deploy funds to keep up with inflows.
While China’s market rally has captured global attention and raised concerns about potential impacts on India, domestic brokerage firm KIE believes the effects on the Indian economy and stock market will be limited. Although some foreign investors may look to shift funds to China, driven by attractive valuations, India’s strong domestic sentiment and inflows are likely to keep its market buoyant. Furthermore, any impact on exports, imports, or oil demand is expected to be minimal, ensuring that India remains well-positioned to continue its growth trajectory amid global market fluctuations.
