China stocks will keep rising after markets in the mainland reopen following the Golden Week break, analysts predicted.
Developments over the last few weeks – flaring geopolitical conflict in West Asia that has triggered an 18 per cent rise in crude oil prices to around $80 a barrel in a matter of days, stimulus measures announced by China to prop up its economy, and lofty valuation of Indian markets (23x one-year forward earnings) – has seen foreign portfolio investors (FPIs) dump Indian stocks worth over Rs 30,000 crore in the first four trading days of October.
Given this, some experts suggest investors should avoid investing in the Indian stock markets and should look at Chinese equities instead from a short-to-medium term perspective. However, they do expect the underperformance of Indian equities versus their Chinese counterpart to be short-lived.
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.
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.
Given this, some experts suggest investors should avoid investing in the Indian stock markets and should look at Chinese equities instead from a short-to-medium term perspective. However, they do expect the underperformance of Indian equities versus their Chinese counterpart to be short-lived.
“With renewed interest in China equities on the back of recently announced monetary and liquidity measures and market expectations of more fiscal stimulus ahead, there is a rising risk of some near-term underperformance of India equities against the broader Asia-ex-Japan index (AeJ). However, this will not be a long-lasting period, as the structural story of India remains quite attractive,” wrote analysts at Nomura in a recent report.
Those at BCA Research, a Canada-based research firm, on the other hand, suggest absolute-return investors avoid Indian markets in the backdrop of recent developments, especially the stimulus by China. Foreign investors over the next several months, they said, will likely gravitate toward Chinese markets at the expense of Indian ones given the recent meaningful stimulus by Chinese authorities and the beaten down level of that bourse.
“Dedicated emerging market (EM) and Emerging Asian equity portfolios should downgrade India from neutral to underweight. Stay with the relative equity trade we recommended last week: short Indian equities/long Chinese A-shares,” wrote Arthur Budaghyan, chief EM / China strategist at BCA Research in a recent coauthored note.
Credit deceleration and fiscal tightening, BCA Research said, point to an imminent slowdown in India’s economic growth. Fiscal spending, it believes, excluding interest payments is rapidly contracting in nominal terms. Both drivers of stock prices – profits and (earnings) multiples – are headed lower in India at a time when equity valuations are at a record high, the research house warns.
“The credit impulse has turned negative. This will restrict both household spending and corporate investment growth. Indian corporate profits will slow further as simultaneously tight monetary and fiscal policies continue to weigh on firms’ topline growth and profit margins,” Budaghyan said.
Valuation wise too, Indian stocks, Budaghyan said, are currently overvalued by two standard deviation relative to their own history. Relative to their EM peers, they are overvalued by 1.5 standard deviation.
“The extreme valuations make this bourse (Indian stocks) highly vulnerable to a major sell-off, which can be caused by any global or domestic trigger. Even a moderate profit disappointment could lead to a major downdraft in share prices,” BCA Research said.
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