The investment strategy of favoring Indian stocks over Chinese ones is seeing a change in direction among some market participants. This shift comes as investors begin to reassess the potential of China's economy, bolstered by government support, against India's soaring market values.
Several asset management firms, including Lazard Asset Management, Manulife Investment Management, and Candriam Belgium NV, are reducing their investments in India following its remarkable market performance. Instead, they are turning their attention back to China, attracted by the signs of economic revival driven by state-backed initiatives aimed at boosting industrial profits and manufacturing sectors.
This emerging trend underscores the investment community's growing belief in China's economic policies to rejuvenate its growth prospects. Despite the ongoing preference for India as a major investment hub by prominent Wall Street banks, concerns over inflated valuations and regulatory cautions regarding market bubbles are making investors cautious.
James Donald, the head of emerging markets at Lazard Asset, explained that the diminishing value of their Chinese investments has paradoxically made the investment case stronger due to the lower prices. Conversely, India's high valuations have negatively impacted their investment returns, prompting a realignment of their portfolio weights towards China.
The adjustment in investment strategies is becoming more apparent as a significant portion of emerging market funds are rebalancing their portfolios to include more Chinese stocks, which had previously been underrepresented, while simultaneously reducing their exposure to Indian markets. This is supported by data showing global investors as net purchasers of Chinese shares through the Hong Kong link for two consecutive months, a trend last observed in the middle of the previous year.
Despite the cautious approach towards this shift, given India's robust economic outlook and the anticipation of Prime Minister Narendra Modi's reelection, the MSCI China Index's performance, which has significantly outperformed its Indian counterpart since February, is a testament to the positive impact of China's stimulus measures.
Portfolio managers like Vivek Dhawan of Candriam's $2.5 billion emerging markets fund are reallocating resources towards China, particularly in sectors that benefit from the country's focus on self-sufficiency and localization, such as the semiconductor industry.
China's economic indicators, including a surge in the official manufacturing purchasing managers index to a year-high, alongside strong exports and consumer price increases, are fueling optimism among investors about the country's economic recovery. However, challenges persist, notably in the real estate sector and mixed earnings reports from leading companies.
Nevertheless, investment professionals are confident in China's economic revival strategy, which is expected to foster a more favorable environment for risk assets over the next year. This confidence is also reflected in the valuation gap, with the MSCI China Index trading at significantly lower multiples compared to the MSCI India Index, highlighting potential investment opportunities in Chinese equities.
While India continues to present a compelling long-term growth narrative, its current market valuations are prompting investors to seek value elsewhere, with China emerging as a viable alternative due to its attractive pricing and strategic policy measures.
