Policy Shift Spurs Transition from India to China: CSLA

Recent changes in policy have sparked a market shift from India to China, as noted by analysts at CLSA. According to their report, China’s new policy direction, which includes monetary easing and fiscal support, is expected to trigger a potential rally in Chinese equities. In contrast, Indian stocks, which have enjoyed steady investment inflows, may now confront a heightened risk of underperformance.

The analysts highlight that the current global market cycle is experiencing a slowdown in economic growth, though a sharp contraction has been avoided. In this context, China, typically seen as a lagging market, is positioned for a comeback as it implements strategies to stimulate growth through support for both the property and stock markets.

CLSA’s evaluation framework now indicates a preference for China over India, assessing market attractiveness based on factors like quality, yield, value, and risk. Chinese stocks are regarded as relatively less expensive and lower in risk compared to their Indian counterparts, ranking higher on quality and yield.

Previously, China’s underperformance was largely attributed to its growth slowdown, which was already reflected in market valuations. However, improvements in key metrics are beginning to gain recognition. Analysts suggest that a sentiment shift surrounding China could lead to significant foreign inflows, potentially attracting around $120 billion, which poses a challenge for India.

India, having received substantial foreign investment in recent years, especially within 2024, may be at risk of outflows as global funds explore opportunities in China. Furthermore, CLSA notes that India’s current valuations appear stretched, increasing its vulnerability.

While Indian equities have been bolstered by strong domestic retail investor participation, the market faces several risks including rising oil prices, potential disruptions from large IPOs, and recent regulatory changes aimed at curtailing retail trading in derivatives. These factors may dampen investor sentiment and prompt a reallocation of funds away from India.

The disparity in performance expectations between the two markets is significant. Chinese equities are anticipated to benefit from their policy shifts, while Indian stocks, despite their recent strong performance, are likely to experience a period of underperformance relative to China. Historically, when India has lagged behind China, the average duration of its underperformance has been approximately 3.9 months, with an average decline of 13%, while Chinese equities have seen considerable gains during these intervals.

In light of this anticipated phase of underperformance for India, CLSA advises investors to focus on high-quality, yield-generating stocks within India, and to exercise caution regarding high-risk, high-growth stocks that may struggle in the near term.