China’s market rally driven by policy measures unlikely to impact India’s economy or flows: Report

In recent sessions, the Chinese stock market has experienced a significant resurgence, outpacing all major global indices as investor demand for Chinese stocks surged to new heights, driven by the government’s stimulus measures. These initiatives have attracted investors back to one of the world’s most heavily-battered markets.

The CSI 300 index, which had plummeted by more than 45% from its peak in 2021 to mid-September, has since made an impressive recovery, soaring over 20%, marking its entry into a technical bull market. Last week’s rally was particularly noteworthy, representing the largest one-week gain for the index since 2008. 

This remarkable turnaround can be attributed to a combination of policy interventions, including interest rate cuts and fiscal stimulus, aimed at stabilising the economy and reviving market confidence.

As a result, Chinese equities have become highly attractive to both domestic and foreign investors, creating a renewed sense of optimism in a market that was struggling for an extended period.

This renewed interest has increased speculations that investors may now reassess their portfolio allocations towards China, which is currently trading at a significantly more attractive valuation than India. 

Furthermore, there is an ongoing debate regarding how China’s economic rebound could potentially constrain opportunities for India. Many believe that if China’s recovery proves sustainable, global companies may re-evaluate their strategies and reconsider relocating operations back to China, which could impact India’s attractiveness as a destination for investment.

Amid this backdrop, domestic brokerage firm Kotak Institutional Equities (KIE) in its recent note stated that the recovery of the Chinese economy and market rebound is likely to have minimal impact on India.

Limited impact

The brokerage does not anticipate any significant impact on the Indian economy resulting from a recovery in the Chinese economy. It expects India’s exports to China to remain stable, with no substantial increase, while imports are likely to proceed as usual. Furthermore, any rise in Chinese oil demand may be balanced by new supplies from both OPEC+ and non-OPEC nations, with Saudi Arabia showing a strong willingness to boost production.

While some metals companies might benefit from the recovery, any upgrades in earnings would depend on the duration and magnitude of China’s economic recovery, which, at present, remains fairly weak, it said. 

Moderation in FIIs inflows likely but not that relevant for the market

According to the brokerage, FPI flows to India, both active and passive, could moderate depending on the strength of the rally in the Chinese markets. While FPI inflows to India have been strong, active FPIs may direct incremental Global Emerging Markets (GEM) inflows to China due to the attractive valuations and potential sustained rally.

However, the brokerage doubts that active FPIs will sell a significant portion of their Indian holdings to move funds to China. Passive inflows, particularly from GEM ETFs, could see some moderation, though any change in relative country weights within benchmark indices would only impact incremental flows from such funds.

Market is dancing to domestic euphoric sentiment anyway

KIE said that the domestic inflows and non-institutional sentiments are unlikely to be affected by the rally in the Chinese market. Non-institutional investors in India are expected to maintain their price-insensitive buying strategy as long as they hold a strong belief in high market returns or observe positive trailing returns.

On the other hand, institutional investors, such as mutual funds, have no choice but to deploy incoming funds into the market, regardless of valuation concerns or conviction levels. In such an environment, valuations tend to become less significant, Kotak Institutional Equities underscored. 

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.