India gains as stock investors flee China pain

"We find India a good alternative, given its improved macro data."

Investors who poured into India in 2014 pulled back this year over concerns about taxes and the slow pace of reforms, preferring markets such as China, Taiwan and South Korea..

Now, fears about Chinese stock market volatility and Beijing's interventions are overriding those concerns and driving them back to India.

India, whose exports to China were worth just USD 11 billion, or 0.5 percent of gross domestic product, in fiscal 2014, is more protected from China's woes than most other Asian markets, according to Rana Gupta, Manulife's India equities specialist.

"Interest in the region at first gravitated to the booming market in China, but with the bubble there now pricked, the performance of China’s immediate Asian trading partners has suffered, too," according to Aberdeen Asset Management's Asian equities team.

"India has been relatively insulated from these developments, hence the outperformance."

DETERRED BY INTERVENTION

The Shanghai Composite surged 60 percent this year until a June 12 peak. Since then, it has lost 27 percent.

The which dropped 4.1 percent from the beginning of 2015 until a trough that coincided with the Chinese peak, has climbed 5.9 percent since then.

Brokerage CLSA has raised its "already substantial overweight in India", its chief strategist Christopher Wood wrote on Aug. 7.

Wood credited a plan to recapitalise Indian public-sector banks, as well as steps to improve their asset quality, for CLSA's positive shift. Government-owned lenders hold nearly 72 percent of the country's banking sector assets.

While progress is slow, such steps are helping to win investors over, apparently at China's expense.

To accommodate CLSA's bigger position in India, it has reduced its overweight in China by two percentage points, Wood said.

Two sources at an Australian fund manager, who declined to be identified or name the company, said the fund cut its Indian exposure in favour of China earlier this year and is now shifting back.

While remaining overweight in China, it has reduced its holdings on concerns about market volatility, and increased its allocation to India, they said.

The Chinese share slump and subsequent volatility, combined with Beijing's efforts to arrest it, have eroded investor confidence.

For Manulife, any increases to its China holdings would require the government to intervene less, Chan said.

Investors also want to see more evidence that the central bank's fiscal and monetary stimulus measures are working and more progress on reform of state-owned enterprises, he said.

India is not without problems. Investors remain frustrated by slow progress on land acquisition reform, the passage of a goods and services tax, and delivery of promised infrastructure, according to Aberdeen.

The discrepancy between valuations and the performance of companies is also concerning, the fund manager said.

The collective net profit of 80 Indian companies, each with a market value of more than USD 100 million, fell 8 percent in the April-June quarter from a year earlier, according to Thomson Reuters data. Analysts forecast net profit will fall 6 percent at these firms in the current quarter.