Can China Reclaim its EM Crown from Rising Star India?

Earlier this year, India overtook China as the most populous country. It has also surpassed it as the EM investor darling.

With India expected to grow for decades to come while the population of China has begun contracting, the demographics of the two countries are now firmly diverging. From a market and investor sentiment perspectives, recent trends have been following the same path.

Despite a short-lived rebound in risk assets in July, investors appear to have voted with their feet. According to recent media reports around three-quarters of capital invested in the country since the start of the year already having flowed out,¹ with the country’s underlying issues remaining unaddressed.

The MSCI China Index has fallen towards its lowest for the year as markets have grappled with disappointment in insufficient policies, the continued deterioration in economic data and challenges in China’s property market. Even a much-anticipated China-US meeting between Presidents Xi Jinping and Joe Biden earlier this month failed to lift the gloom. The CSI 300 Index has fallen even as global equities have been enjoying a recent relief rally.²

Figure 1. India outperforming China, cumulative returns (USD)

January 2010 – October 2023

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Source: Bloomberg.

By contrast, India has emerged as an investor favourite in recent years. The surge in its equity market mainly reflects the strength of the economy, with an urban middle class boasting increasing disposable income and a young demographic poised to support further growth. India’s government has been actively courting foreign investments to boost technology ties and trade, a move underscored by Indian Prime Minister Narendra Modi’s meeting with US President Biden in September.

Recent market returns in China clearly reflect analysts’ pessimism regarding the country’s outlook. While some degree of downward revisions is always to be expected (and revisions have been on a downward trend since mid-2021) analysts have become significantly more negative on China in recent months, as Figure 2 illustrates. The question now is: Can sentiment towards China deteriorate much further or are things approaching a bottom?

Figure 2. Analyst sentiment towards China keeps deteriorating

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Source: Chaoyang Sustainable/Man Numeric.

That said, even if India’s fundamentals do appear more attractive, the respective valuations of the two markets should not be ignored. As investors paid up for India’s growth potential in recent years, they have pushed market valuation to extremes, sharply contrasting with the valuation of the China market, both onshore and offshore.

In fact, from a P/E perspective, the Indian market now appears about twice as expensive as the Chinese market. Will China remain behind?

Figure 3. India’s market is now twice as expensive as China’s

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Source: Bloomberg.

Without material easing measures, China’s economy could certainly feel more downward pressure. However, given the government’s focus on economic growth, providing appropriate policy support would have the potential to enhance private sector confidence, which could lead to a resurgence in its stock market.

Considering the market’s current valuation, which is nearing historical lows, there are reasons to believe Chinese equities could be due for a reappraisal.

With contributions from Mickael Nouvellon, Senior Portfolio Manager, Man Numeric.

1. www.ft.com/content/20c5d5c8-dd64-4c22-a3fc-60d4a8336aeb.
2. www.bloomberg.com/news/articles/2023-11-18/china-stock-traders-get-little-solace-in-pivotalweek-for-market