Most of the foreign financial majors including Macquarie and Citi continue to be bullish on the Indian markets even as they believe that the recent stimulus measures announced in China could be a cause for concern for India especially affecting the liquidity flow amidst high valuation woes.
“As China rallies, pressures on India will rise, especially given its slowing economy and high valuations, and liquidity will be ‘sucked-out’ from other EMs. Long-term, we are still more comfortable with India's secular outlook than with China's battle against high saving rates,” stated a report by Macquarie titled ‘Is it time to fade China and buy India?’. Macquarie has an overweight recommendation on both, India and China, with India being one of its “consistent secular calls” along with the US and Japan.
Interestingly, global financial major CLSA has raised its China exposure while cutting India overweight to 10 percent from the earlier 20 percent. Simply put, CLSA has reduced its exposure to Indian equities to make room for increasing its exposure in the Chinese stock markets following the stimulus measures announced in China.
This assumes significance as many in the market have been talking about the ‘buy China, sell India’ factor ever since China rolled out measures to boost economic growth and restore confidence in its financial markets, especially following stagnation in the property sector.
The People's Bank of China (PBOC) has cut the main policy interest rate from 1.7% to 1.5% and reduced the Required Reserve Ratio (RRR) for banks by 50 basis points, injecting around 1 trillion RMB (approximately $142 billion) into the economy.
Following this, mortgage rates are expected to drop by an average of 50 basis points, benefiting about 50 million households and saving them around 150 billion RMB ($21.1 billion) in interest.
To revitalise the stock market, a RMB 500 billion (around $71 billion) swap facility has been launched for brokers, alongside refinancing options for listed companies to support share buybacks. The government is increasing fiscal spending, marking a shift from its previous cautious approach.
Meanwhile, Citi, in a recent note, has stated that it remains “constructive and would buy any dips” in the Indian market.
“… on 1Y/2Y, India’s outperformance is significant, and India’s valuation premium is significant to EM/China, prompting investor queries on risks to India from any rotation out. In our view, strong macro/growth outlook and resilient domestic inflows have been a major driver of Indian equities,” stated the report.
“While some rotation into China + higher share of China in incremental EM inflows can happen if the rally sustains, the overall conducive environment for EM inflows reduces likelihood of significant FII outflows from India,” added the report.
Incidentally, FPI flows into India in the current calendar year peaked in September with the monthly net flows pegged at nearly $6.9 billion though October has seen a reversal with outflows totalling $4.4 billion.
Independent global macro research firm Gavekal Research believes that India should thrive in the current macro environment, especially if the US Federal Reserve’s rate cuts spur more capital flows to emerging markets.
“India’s higher weighting in international indexes will aid inflows, much as its inclusion in JPMorgan’s emerging markets bond index is boosting foreign flows into fixed income. Even if China sustains its rally, many foreign investors remain reluctant to invest there: China’s geopolitical headwind is India’s tailwind. Foreign investors can certainly find better value in other EMs, but it is too early to call time on India’s bull market,” it stated in a recent report.
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