India vs China – The Battle for Emerging Market Supremacy
January 28, 2024
It’s been hard to escape the India vs China debate the last few weeks. So far year-to-date, MSCI India is flat while MSCI China is down -10%, trending in line with last year’s +21% and -11%, respectively (all in USD). India headlines are about inflows, economic growth, and new highs while China headlines are about continued property woes, endless investor outflows, and failed rescues.
In recent months, India has fully de-coupled from broader emerging markets, reaching all-time highs in US dollar terms and trading at a 26x PE (vs 13x for broader emerging markets). India’s historical performance was driven by fundamentals – earnings grew faster than in broader emerging markets, supported by higher nominal GDP and domestic demand. However, prices matter and the good news – nominal GDP, superior demand, earnings growth, and inflows from international investors – are all well understood. The possibility of tail risks – slowing growth, inflation, rupee depreciation, and a recovery in China – are largely ignored by the market. As a high beta and very expensive market, Indian stocks are likely to reverse aggressively should global risk assets sell off, or Chinese assets catch a bid.
In contrast, virtually no investor we know has positive things to say about China. Here, it is the negatives that are well understood – weak earnings growth due to real estate implosion and loss of consumer confidence, lack of credit impulse, geopolitical risks, and the heavy hand of the state. The result is a 9x PE for MSCI China, cheap on both an absolute basis vs history and on a relative basis vs other equity markets. Nearly 3 years of outflows and negative price action suggest both capitulation by investors and auto closes of derivatives-based trades. Lastly, investors seem to barely price in even a small chance of aggressive government support for markets and the economy. The result of these dynamics is that rallies can be fast and furious, much like last week’s 5% gain in the space of 2 days. We are not suggesting that investors sell India outright and own China only. Instead, a balance of the momentum trade (India) and the valuation trade (China) might make sense. After all, among China’s tech and platform stocks, there are plenty of names that have zero debt, high double-digit margins, and free cash flow, as well as low valuations. Given the India and China markets’ inverse correlation, emerging market portfolio volatility and drawdowns can be improved by the inclusion of both. With China in particular, it is times like this – when there are zero buyers to be found – that longer horizon investors can substantially improve their returns.
India (Black) and China (Green) Equities Relative to Emerging Markets
India (Blue) and China (White) Equity Valuations
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This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market. With 109 constituents, the index covers approximately 85% of the Indian equity universe. The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 738 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.