India or China? Macquarie finds the battle tough, but India takes an edge

Macquarie expects India Inc to deliver significantly stronger ROEs at around 16-17 percent, compared to just 9 percent for their Chinese counterparts.

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26 Aug, 2025 12:21

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As China introduced stimulus plans to revive its faltering economy and battered property sector, optimism began to build, pulling some funds from Indian equities into the world's second-largest economy. However, as market expectations continue to be thrashed by the Chinese government’s game of hide-and-seek in unveiling clear plans for its stimulus strategy, Macquarie now finds the choice between India and China to be a difficult one.

While both markets have their own pros and cons, Macquarie views China’s recent pivot as merely an attempt to de-risk and meet growth targets. The brokerage does acknowledge that future announcements could give a short-term boost to Chinese equities, despite ongoing structural issues. Macquarie sees these gains as more of a trading play rather than a long-term investment, with India's stronger fundamentals continuing to tilt the balance in its favor, particularly since China's policies still lack strength in areas like consumption and real estate.

So while Macquarie highlights that India versus China debate remains the single most important question facing emerging markets investors, the tide it tilting much in favour of India.

According to Macquarie, the recent shift in flows from India to China are based on the perception that the government is finally focusing on the economy and hence might underplay on political, geopolitical and regulatory issues.

"Although few believe that China will address its deeply imbedded structural challenges, at the very least, it should be able to place the floor under nominal and real GDP, helping corporates to deliver something close to the current (10 percent-11 percent) EPS estimates," Macquarie said. "Investors expect that China will eventually embark on meaningful stimuli that will not only underwrite 2024 growth but extend into 2025-2026," it added.

However, Macquarie also warned that despite the expected stimulus support, global economic conditions are unlikely to favour a significant rebound in China's export-driven economy.

Meanwhile, another big factor that's triggered the shift in funds from India to China so far has been the difference in their valuations. While Indian equities, despite the recent erosion, are still seating at a 70 percent cumulative four year outperformance, their Chinese counterparts are at a 35 percent cumulative four year underperformance, making the latter relatively cheaper.

Despite challenges like weakening GDP growth, high EPS expectations, and historically high valuation multiples, Macquarie remains confident in India's future. The brokerage believes that while 8 percent growth might be out of reach due to the need for improved productivity and capital efficiency, India’s economy should still grow at a steady 6-7 percent. This implies strong double-digit nominal GDP growth, far outpacing China’s estimated 4 percent. Furthermore, Indian companies are projected to deliver significantly stronger returns on equity (ROEs) at around 16-17 percent, compared to just 9 percent for their Chinese counterparts.

Also Read | Bank of America Fund Manager Survey highlights pivot in sentiment away from India to China