China or the US: Which is a better market now to bet on global diversification?

Donald Trump returning as the US President gives the American economy a big push.

The momentum in the US equity markets and cheap valuations of Chinese stocks have made both these geographies ideal for global diversification. Then where should mutual fund investors park their money?

Data available with ACE MF, a mutual fund research platform, shows that US equity funds on average has delivered 33.9 percent and 12.3 percent compounded annual growth rate (CAGR) returns over one-year and three-year basis.

China-focussed equity funds, on the other hand, have delivered 15.2 percent and -6.0 percent returns over the same period.

“Sharpening of competition, which is more strategic, between the world’s two biggest economies requires a fundamental rethink of investment approaches. Valuation models based on the past performance will be unable to capture the tectonic shifts that are now taking place,” said Narender Singh, smallcase manager and founder of Growth Investing.

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The return of Donald Trump as the US president may give the American economy a big push. His approach to boosting GDP growth usually revolves around bold trade deals and using tariffs as a leverage to get the best terms for industries there. This may have an impact on Chinese markets.

China’s stimulus hopes

On a very short-term basis, China’s markets have beaten returns delivered by US markets because of China's stimulus policy released last month aimed at boosting liquidity, stimulating consumer spending, and aiding the real-estate sector.

“Now, if we compare both the markets, the Chinese market is attractive at the moment, however, this push comes after a long time and we expect the impact to be short term,” said Chirag Muni, executive director at Anand Rathi Wealth.

Kirtan Shah, founder of Credence Wealth, pointed out that China markets are much cheaper compared to most other markets.

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“In China it is not only about valuations but many other factors such as geopolitical and internal political environment, and regulation stance of the Communist Party. It is difficult to predict how things may pan out in China,” Shah said.

Meanwhile, Wall Street’s outlook on China’s stock market has turned cautious, with analysts from major firms like Goldman Sachs and Morgan Stanley lowering their expectations amid signs of a slowing economic growth.

The Trump card

When it comes to the US equities, it is the biggest market in terms of global diversification among Indian investors. The US-focussed equity mutual funds have assets under management (AUM) of around Rs 42,000 crore as of October-end.

According to experts, Washington and Beijing are battling for economic and geopolitical supremacy with the weapons of choice being latest technologies such as AI (artificial intelligence) and quantum computing.

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“With Trump 2.0, and his aggressive stance towards China, decoupling will be costly. Any divorce, even the most amicable one, is costly. Investors should also pay attention to the massive debt accumulated in the US, sticky inflation and expected tax cuts. Debt servicing might be a tough hill to climb,” Singh alerted.

East or West?

According to Kunal Valia, who founded StatLane, a Sebi-registered research analyst, the US is a growth market while China is a value market.

“The US markets are somewhere around 21-22 times forward price-to-earnings (P/E), and that is reasonably expensive for a market which is giving us 8-10 percent yearly growth. As for China, it hasn’t delivered any returns in the last 10-15 years. While the bias is towards holding large allocations towards the US, some allocation to Chinese market is also going to be productive for investors with a three-five-year view,” Valia said.

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According to Anand Rathi Wealth’s Muni, the returns in the last one month have been around 25 percent of Shanghai Composite Index, whereas the return in the last three years stands at around minus-3 percent. “If we analyse both the scenarios, we believe that the US market is in a stronger position at the moment,” Muni said.

Options in the US markets

When it comes to the equity US markets, there are many options available to Indian mutual fund investors. There are funds based on the Nasdaq 100, which is a tech-heavy index, and those based on the S&P 500, which is a diversified index.

Kirtan Shah suggests funds based on the Nasdaq 100 index to help Indian investors better, as there is a heavy overlap in the S&P 500 Index.

Experts also suggest that the US-focussed bond funds can be a good diversifier in investor portfolio. “Investors can look at the US Treasuries as a core part of bonds portfolio as the carry is attractive. Investors can consider domestic funds that are investing in US Bond ETFs that are investing wide range of US treasuries maturing in 1-10 years. A constructive view on the US bonds is further cemented as it offers a relatively higher carry of more than 125 bps. In India, based on the latest CPI (retail) inflation of 6.2 percent, there is negative carry,” he said.

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Valia further suggests that investing in such funds of funds (FoFs) structure offers tax efficiency for a holding period of more than two years.