Macquarie Capital believes that ongoing China rally may continue till the end of this year, possibly leading to more foreign outflow from India over the next 2-3 months, but added that this will be a healthy correction.
Sandeep Bhatia told CNBC-TV18 that Macquarie sees this China trade fade away once a new US administration comes in place, and formulates policies around tariff barriers against exports from Beijing.
"If the China rally fades, and most likely it would as the geopolitics suggests, whoever wins the US Presidential Election would be setting up trade barriers. Also, neither the EU nor India are welcoming Chinese exports. So, all said and done, this China rally should fade away next year," Sandeep Bhatia said.
Already, EM investors are disappointed with the lack of any concrete, fresh stimulus announcement by China, as was being speculated, after its week-long National Day Holiday break.
Bhatia added that the rotation of money into China is one of the reasons for FPIs to pull out of India, and also since valuations in the mid and small-cap space had reached levels that could not be justified. "There is a good bit of valuation correction that the market needs, from here on. So, China is just one reason for India to see some outflows from FPIs," said Sandeep Bhatia.
"This is a healthy and welcome correction," Bhatia added.
The nature of selling in India has been such that it is seeing both hedge funds as well as long-only fund pull out right now, which Sandeep Bhatia said was partly due to profit booking, as well as to fund upcoming IPOs. "There is good money made in India, so we're seeing profit booking, plus the valuations are steep," he added.
The spate of IPOs in 2024 as well as promoter selling has also indicated that the market was looking over-valued, Sandeep Bhatia said. "If the person running the business thinks it is over-valued then it definitely is."
Read More: India's IPO bandwagon hits a speed bump as China stocks rebound
Indian market saw a significant amount of promoter selling earlier this year. In the first six month of 2024, promoter entities of 37 companies sold shares worth $10.5 billion, or Rs 87,400 crore, highest in the past five years. In fact, stake sale by just four companies - TCS, Interglobe, Indus Tower and Mphasis - added up to almost half of this amount.
Read More: Surge in promoter sell-offs: A signal of market peaking?
Earlier this year, India's weightage in the MSCI EM Investable Market Index (IMI) index surged past that of China's, and is now nearing the threshold to surpass China in the broader MSCI Emerging Markets index as well. This, Sandeep Bhatia said was a 'major trigger', indicating that the Indian stock market was richly valued, since the India's economy is still not comparable in size to that of China's.
However, Macquarie Capital believes that China will 'not be a structural growth driver' for the world economy, as it has been for the last 20 years. A lot of the issues of the Chinese economy are expected to come to the forefront next year. "There is a case for a trading rally which can last for a couple of months," said Bhatia, but this rally would fade away next year. India, along with US and Japan are the 'structural markets' for the world, according to Bhatia.
Commenting on the Haryana and Jammu & Kashmir state elections, Sandeep Bhatia said he expects more 'competitive welfarism' to come into play in government policies, as being captured by the rising fiscal spend as well as the consumption stimulus being offered.
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