Wall Street rebuff China for India in a historic markets shift. Global investors are diverting billions of dollars away from China’s slowing economy, marking a departure from two decades of considering China as the world’s premier growth story.
This massive capital redirection is now finding its way to India, where financial heavyweights like Goldman Sachs and Morgan Stanley are endorsing the South Asian nation as the primary investment destination for the next decade.
This transformative trend is akin to a gold rush, with Marshall Wace, a $62 billion hedge fund, positioning India as its most substantial net long bet after the United States.
Zurich-based Vontobel Holding AG’s arm has designated India as its leading emerging-market holding, and Janus Henderson Group Plc is exploring potential fund-house acquisitions. Even traditionally conservative Japanese retail investors are embracing India while reducing exposure to China.
The underlying driver of this shift lies in the divergent paths of two major Asian powers. India, currently the world’s fastest-growing major economy, has undergone extensive infrastructure expansion under Prime Minister Narendra Modi’s leadership.
The objective is to allure global capital and supply chains away from Beijing. In contrast, China is grappling with persistent economic challenges and a deepening divide with the Western-led global order.
Vikas Pershad, Asian equities portfolio manager at M&G Investments in Singapore, explains the global interest in India by saying, “People are interested in India for several reasons – one is simply it’s not China. There’s a genuine long-term growth story here.”
While this positive sentiment towards India is not entirely new, investors are now more inclined to view the market as resembling the China of yesteryears – a vast, dynamic economy opening up to global investments in innovative ways.
Despite acknowledging the challenges such as a largely poor population, expensive stock markets, and insular bond markets, investors are crossing over to India, deeming the risks of betting against the country to be greater.
Historical data indicates a close correlation between India’s economic growth and the value of its stock market. If the nation sustains a 7% growth rate, the market size can be expected to grow at least at that rate on average.
Over the past two decades, both GDP and market capitalization in India surged from $500 billion to $3.5 trillion.
Capital flows underscore the growing enthusiasm for India.
In the US exchange-traded fund market, the primary fund buying Indian stocks witnessed record inflows in the final quarter of 2023, while the four largest China funds experienced combined outflows of almost $800 million.
Active bond funds have deployed 50 cents in India for every dollar withdrawn from China since 2022, according to EPFR data.
As of mid-January, India briefly surpassed Hong Kong to become the world’s fourth-largest equity market. Morgan Stanley predicts that by 2030, India’s stock market will rank as the third-largest.
India’s weight in MSCI Inc.’s benchmark for developing-market equities has reached an all-time high of 18%, contrasting with China’s shrinking share to its lowest on record at 24.8%.
Mark Matthews, the Singapore-based head of Asia research at Bank Julius Baer, notes the shifting index weights, saying, “In terms of index weights, China would be lower and India bigger. That’s the direction.”
Even traditionally cautious Japanese retail investors are warming up to India. Five India-focused mutual funds are now among the top 20 in terms of inflows, with assets at the largest, Nomura Indian Stock Fund, reaching a four-year high.
Hedge funds like Marshall Wace highlight India’s robust growth and relative political stability as reasons to remain optimistic, despite expensive valuations in the broader market. Karma Capital, managing money in India for institutions like Norges Bank, reports a keen interest from US investors eager to explore and understand the Indian market.
India’s strategic efforts to position itself as a manufacturing alternative to China, coupled with changing power dynamics, have enhanced its appeal.
The US and other nations recognize the need for strong business ties with India, despite occasional criticisms of its tax policies. India now contributes over 7% to the global output of iPhones and is investing trillions of rupees in upgrading infrastructure.
Prime Minister Modi’s plan to position India as the world’s new growth engine includes a substantial boost in infrastructure spending, reaching 11.1 trillion rupees ($134 billion) in the coming fiscal year, as announced by Finance Minister Nirmala Sitharaman.
Efforts to create a vast technology ecosystem aim to bring millions into the digital marketplace, making India an attractive destination for global companies and investors.
Despite the overall optimism, some hurdles remain. The exuberance has led to Indian equities becoming among the most expensive globally, with the S&P BSE Sensex Index nearly tripling since its March 2020 low.
While earnings have doubled, the index trades at more than 20 times future earnings, 27% higher than the average for the 2010-2020 period.
Investors are bracing for a potential correction after eight consecutive years of annual gains in local shares.
The anticipation of Prime Minister Modi winning a third term in office during this year’s national elections adds to the market uncertainty.
However, expectations of policy continuity after a recent sweep in state polls by Modi’s party may mitigate short-term market jolts.
Charles Robertson, head of macro strategy at FIM Partners Ltd., points out that while India has made significant progress, it still has a long way to go, and its potential peak growth is below what China achieved.
Despite these challenges, India’s long-term appeal remains strong for many investors. With a relatively low per capita income, the country is seen as setting the stage for multi-year expansion and new market opportunities.
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Initiatives such as the opening up of its sovereign bond market to JPMorgan Chase & Co’s global debt index and efforts to globalize the rupee contribute to confidence in India’s long-term impact.
As Wall Street rebuff China for India in a historic markets shift, Gaurav Narain, a money manager advising India Capital Growth Fund, emphasizes that confidence stems from the long-term impact of such initiatives rather than the near-term outlook on the nation’s stocks and bonds.
“There is no longer a need for a ‘sell the India story’ pitch from us,” he said. “It’s a ‘buy into India’ from people who are aware of the positive changes.”
