India Stocks' Euphoria Likely To Remain Firm Even As China Bulls Take Charge

The Indian stock market is unlikely to come under significant threat from foreign investors, while bulls in the emerging market's anchor country are recovering in hopes of an economic revival.

The much-awaited turnarounds in China took shape as traders expected the stimulus to boost the economy. The benchmark index—CSI 300—rose for a ninth straight day with an 8.5% jump on Monday.

This rally comes after the country unleashed a series of measures, including interest rate cuts, liquidity for banks, and incentives for homebuyers, which were announced last week. Further, the 24-man Politburo vowed to complete the country’s annual economic goals.

China's CSI 300 is up 22% from its September lows to enter a technical bull market, according to Bloomberg. In the latest economic data, the South Asian country's September manufacturing PMI came in at 49.8 versus the estimate of 49.4, which gave a boost to Monday's rally.

Chinese markets have rallied on the back of stimulus measures. The rally in the country's stocks should sustain, given these massive stimulus measures. With the valuations, the whole market is available, said Kunal Mehta, associate director at Equirus. "We feel both India and China will see FII buying."

The monetary and fiscal stimulus being implemented by the Chinese authorities is expected to stimulate growth in China, according to V K Vijayakumar, chief investment strategist at Geojit Financial Services Ltd. "But there is no guarantee that these stimulus measures will work."

However, foreign institutional inflow will not see an immediate switch to China from India, given the strong fundamentals the latter has.

India's stock market rally could face short-term challenges as China's stimulus could potentially draw foreign institutional investor flows, according to Ajit Mishra, senior vice president of Research at Religare Broking Ltd. "However, substantial domestic inflows in India are expected to help maintain market momentum."

India's robust economic fundamentals and growth outlook are likely to keep it attractive to foreign investors over the long term, he said.

India's appeal as an investment destination remains robust, driven by its continuing policy improvements, and growing role as a potential substitute for Chinese manufacturing networks. While China's growth prospects could attract some capital, it is unlikely that FIIs will significantly reduce their exposure to India, Mishra said.

FIIs buying Chinese stocks is likely to be more of a tactical trade to benefit from the low valuations, he said. "India’s growth story is very promising."

Indian benchmarks have been on a record run, with foreign investor buys hitting a fresh monthly record in September. Global funds also began to go big as the fastest-growing economy targets to anchor the emerging markets by climbing key gauges in MSCI Inc.

India is narrowing its gap to take leadership in the key emerging markets gauge of the international index aggregator. The South Asian country piped China to top the MSCI's EM Investable Market Index earlier this month.

Foreign institutions have been net buyers of Indian equities worth Rs 57,724 crore so far in 2024, according to data from the National Securities Depository Ltd., updated till the previous trading day.

India stocks have been the second-best performing among advanced peers, only after the stocks on Wall Street. The NSE Nifty 50 and the 30-stock BSE Sensex have risen 18.7% and 16.7%, respectively, so far this year, making them the eighth and tenth best-performing Asian indices.

A correction in the Indian market is desirable since valuations are elevated in the mid-and small-cap space, Vijayakumar said. "On corrections, domestic money will support the Indian market."

Chinese stocks could also have an advantage on the valuation front. The PE of the Hong Kong market, where Chinese stocks are listed, is around 12, compared to around 22 price-to-earnings for Nifty in India, he said.

The bull run may continue in the short term, but its longevity will depend on the success of structural reforms and broader global economic conditions, Mishra said.

Rate cuts across major geographies will also continue to drive higher liquidity in the system, according to Rakesh Vyas, co-chief investment officer at Quest Investment Advisors. "The projected corporate earnings growth of India remains in the mid-to-high teens, implying that investors will continue to find India an attractive destination."