Buy China, Sell India rant; FII exodus peaks; when will Sensex rebound?

The Chinese economy, once grappling with a slowing property market and external pressures, is now finding its footing, its key success lies to the bold set of policy measures introduced by the government.

Since September 2024, China has implemented a series of fiscal and monetary policies aimed at stabilizing its economic growth at approximately 5% for both 2024 and 2025. These measures are designed to counteract challenges such as increased tariffs imposed by the United States under President Donald Trump. As a result, foreign institutional investors (FIIs) are reallocating funds from India to China, seeking higher returns in the Chinese market.​

China's Economic Stimulus Measures

In response to economic headwinds, the Chinese government has introduced several key initiatives:​

Fiscal Policies: The government announced a record issuance of special treasury bonds worth 3 trillion yuan and set a targeted budget deficit of 4% of GDP. These steps aim to inject liquidity into the economy and support public spending. ​

Monetary Policies: The People's Bank of China (PBOC) has adopted an "appropriately loose" monetary policy stance, including significant interest rate cuts and the introduction of new tools to support capital markets. ​

Property Market Support: To address the struggling property sector, China has implemented tax incentives for property transactions, expanded funding for unfinished housing projects, and relaxed home purchase restrictions in major cities. ​

Despite these efforts, some measures have faced challenges. For instance, a 300 billion yuan relending program aimed at stabilizing the property market has seen limited uptake, with only 16 billion yuan drawn since its announcement in May 2024. Analysts suggest that financial and operational constraints faced by state-owned enterprises may be hindering the program's effectiveness. ​

Impact on Foreign Institutional Investors

The comprehensive stimulus measures have bolstered investor confidence in China's economic prospects. As a result, FIIs are increasingly viewing China as a more attractive investment destination compared to other emerging markets, including India. This shift is influenced by several factors:​

Valuation Disparities: India's stock market has been experiencing significant growth, leading to an increased weighting in the MSCI Emerging Markets Index. However, high valuations, with an average price-to-earnings ratio of 24 times, have made some investors cautious. In contrast, China's market offers more affordable valuations, presenting a less risky alternative. ​

Economic Growth Outlook: China's proactive policy measures are perceived as effective in sustaining economic growth, making it an attractive option for investors seeking stability and potential returns. Conversely, concerns about India's economic outlook, including expectations of GDP growth below consensus for FY2025, have contributed to the reallocation of funds. ​

Market Reactions and Future Implications

The "Buy China, Sell India" trend has manifested in notable market movements. Over the past month, while India's Nifty 50 index experienced a 4% decline, China's Hang Seng and Shanghai's CSI 300 indices saw gains of 14% and 22%, respectively. ​

Despite the current shift, some analysts believe that India's strong macroeconomic fundamentals and robust growth expectations will continue to attract foreign investment in the long term. Citi Research, for instance, suggests that while China may offer better returns in the short term, India's economic strengths remain appealing to investors. ​

When Will India's Sensex Rebound?

India's stock market is experiencing a temporary downturn as foreign institutional investors (FIIs) shift their focus to China. However, despite this short-term trend, India's economic fundamentals remain strong, raising the question: When will Sensex rebound?

The Road to Sensex Rebound

India’s strong macroeconomic fundamentals, resilient corporate earnings, and stable growth prospects are expected to drive a market recovery. Analysts believe:

Growth Momentum Will Persist: While short-term challenges exist, India’s GDP growth is expected to remain strong, attracting FIIs back.

Valuations Will Normalize: Once China’s stimulus-driven rally stabilizes, India's premium valuations may become more attractive again.

Sectoral Strengths Will Shine: IT, banking, and manufacturing sectors continue to show long-term resilience, supporting market recovery.

While FIIs are currently favoring China, India's Sensex is likely to rebound as its strong fundamentals reassert themselves. Market cycles shift, and India’s long-term growth story remains compelling.