Institutional investors are concerned about peak valuations in the Indian market. (AI image)

Is it ‘Buy China, Sell India’ now? In the past two years, investors in emerging markets who followed the “Buy India, Sell China” strategy have made significant profits. However, they are now starting to reverse their positions in response to Beijing’s massive stimulus package aimed at reviving the economy and markets.
The Chinese stock market has experienced a remarkable resurgence, with the CSI300 index surging 25% in a single week and the Hang Seng index gaining 16%.In contrast, the Nifty and Sensex indices in India have been under selling pressure, with foreign institutional investors (FIIs) withdrawing more than a billion dollars in a single day’s trade, resulting in a nearly 1,300-point drop in the Sensex.
China has taken steps to boost liquidity and stimulate consumption demand by reducing the reserve ratio for banks and lowering the mortgage rate for existing housing by 50 basis points each. The People’s Bank of China has also indicated that it will implement policy easing in the near future.
Institutional investors are concerned about peak valuations in the Indian market, which has been driven by retail investor liquidity. Meanwhile, FIIs have compelling reasons to invest in the Chinese resurgence story, including a large stimulus package, attractive valuations, and an underweight stance, according to an ET report.
Joanne Siew Chin of DBS Group was quoted as saying, “India has performed strongly and we are looking at other markets. China and ASEAN could actually outperform. India is actually quite a domestic liquidity market.”
The Singaporean financial services firm believes that China will outperform India for the remainder of 2024, following the government’s announcement of a range of monetary and liquidity measures and its commitment to further fiscal support.
According to Chetan Seth of Nomura, “Feedback from investors, and assessing some market indicators suggest that, this time around, the rally might be more sustainable relative to previous start-stop rallies. As we noted in the past, investors have been underweight HK/China stocks, and this may cause many of them to chase stocks to neutralise those positions. We suspect that many of the China bulls will likely also emerge from the long winter hibernation.”
Recently, India’s weight in the MSCI AC World Investable Market Index surpassed that of China, providing FIIs with sufficient room to reallocate their investments. The low valuations of Chinese stocks are also contributing to the ongoing momentum.
Dr. V K Vijayakumar of Geojit believes that this could be a tactical trade that may continue for some time, with FIIs potentially selling in India and shifting more funds to better-performing markets. However, he notes that FII selling is unlikely to have a significant impact on the Indian market, as massive domestic investments can easily absorb the sales.
Kotak Institutional Equities analysts observed that FII inflows in India have been primarily passive and that active FIIs may consider deploying additional inflows into China.
However, they doubt that active FPIs will sell a substantial portion of their holdings in India to invest in China. The analysts also noted that any change in the relative weights of the two countries in various benchmark indices will only affect incremental flows from Global Emerging Markets (GEM) ETF funds.