India Gains as Stock Investors Flee China Pain

Foreign investors switch money from China into India as Shanghai Composite’s weak run continues

Govt intervention in Beijing’s stock markets spooks foreign investors (Photo: Reuters)

• Sensex fell while Shanghai Composite climbed in early 2015
• Since the June rout in China, the Sensex has recovered
• India’s July inflows at Rs 5320 crore after 2 months’ outflow
• Shanghai-HK Connect outflows at $7.3 bln since early July
• Investors also deterred by govt intervention in Chinese market

China’s recent stock market pain is proving to be India’s gain, with share prices in domestic markets reviving as investors who cut their holdings earlier this year switch out of Chinese equity markets and back into India’s.

Sensex, which fell as the Shanghai Composite index climbed between January and China’s stock market rout in June, has reversed course and moved in the opposite direction to the Chinese benchmark since.

India recorded inflows of Rs 5,319 crore ($816 million) in July after two months of outflows, regulatory data shows. Meanwhile, northbound investment under the Shanghai-Hong Kong Stock Connect saw fund outflows of about 47 billion yuan ($7.3 billion) since early July, according to Reuters calculations.

The euphoria of the China A-shares markets on the back of the growth of margin financing was deemed unsustainable. We find India a good alternative, given its improved macro data.
— Ronald Chan, Asian Equities Head, Manulife

Investors who poured into India in 2014 pulled back this year over concerns about taxes and the slow pace of reforms, preferring markets such as China, Taiwan and South Korea.

China Spooks Foreign Investors

Now, fears about Chinese stock market volatility and Beijing’s interventions are overriding those concerns and driving them back to India.

India, whose exports to China were worth just $11 billion, or 0.5 percent of gross domestic product, in fiscal 2014, is more protected from China’s woes than most other Asian markets, according to Rana Gupta, Manulife’s India equities specialist.

Interest in the region at first gravitated to the booming market in China, but with the bubble there now pricked, the performance of China’s immediate Asian trading partners has suffered, too. India has been relatively insulated from these developments, hence the outperformance.
— Aberdeen Asset Management

Sensex revives even as foreign outflows derails China’s stock markets

The Shanghai Composite surged 60% this year until a June 12 peak. Since then, it has lost 27%.

The Sensex, which dropped 4.1% from the beginning of 2015 until a trough that coincided with the Chinese peak, has climbed 5.9% since then.

CLSA Raises India Overweight

Brokerage CLSA has raised its “already substantial overweight in India”, its chief strategist Christopher Wood wrote on August 7.

Wood credited a plan to recapitalise Indian public-sector banks, as well as steps to improve their asset quality, for CLSA’s positive shift. Government-owned lenders hold nearly 72% of the country’s banking sector assets.

While progress is slow, such steps are helping to win investors over, apparently at China’s expense.

To accommodate CLSA’s bigger position in India, it has reduced its overweight in China by two percentage points, Wood said.

Two sources at an Australian fund manager, who declined to be identified or name the company, said the fund cut its Indian exposure in favour of China earlier this year and is now shifting back.

While remaining overweight in China, it has reduced its holdings on concerns about market volatility, and increased its allocation to India, they said.

Deterred By Intervention

The Chinese share slump and subsequent volatility, combined with Beijing’s efforts to arrest it, have eroded investor confidence.

For Manulife, any increases to its China holdings would require the government to intervene less, Chan said.

Investors also want to see more evidence that the central bank’s fiscal and monetary stimulus measures are working and more progress on reform of state-owned enterprises, he said.

Not All Is Well In India

India is not without problems. Investors remain frustrated by slow progress on land acquisition reform, the passage of a goods and services tax, and delivery of promised infrastructure, according to Aberdeen.

The discrepancy between valuations and the performance of companies is also concerning, the fund manager said.

The collective net profit of 80 Indian companies, each with a market value of more than $100 million, fell 8% in the April-June quarter from a year earlier, according to Thomson Reuters data. Analysts forecast net profit will fall 6% at these firms in the current quarter.