The valuation differential between India and China has reverted to its traditional mean after a huge 65% outperformance of MSCI China over MSCI India from the end of October to late January. So far this year, MSCI India is down 3.6%, while MSCI China has gained 8.2%. In 2022, MSCI India rose 1.6% while MSCI China dropped 23.51%.
“This is another reminder that the mean reversion trade has already happened, with the next key issue for China-related equities remaining whether demand for residential property picks up in the next few months,” said Christopher Wood, global head of equity strategy at Jefferies.
FPIs have remained net sellers for much of this year and have been buying into cheaper markets such as China, Hong Kong and South Korea where valuations are attractive.
Flows into China have picked up pace since December after the country decided to junk its zero-Covid policy and and reopened borders, raising expectations of an economic recovery.
Foreign investors purchased a net $7.3 billion of Chinese bonds and another $8.4 billion of A-shares in December, according to reports. They added another $12.6 billion worth of Chinese stocks and bonds combined on a net basis in the first half of January.
“This ‘short India and long other cheaper markets’ strategy has led to a big underperformance of the Indian market so far this year. This kind of underperformance is unlikely to last long,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services, in a recent note.
Foreign portfolio investors have pumped in about $685 million in the last five sessions into Indian shares, after yanking out $4.2 billion in the year to February 8. FPIs pulled out $1.5 billion last year.
This year, South Korea and Taiwan have seen foreign flows to the tune of $7.3 billion and $8.7 billion, respectively.
Currently, the Indian markets are range bound, with the Nifty trading at about 18x FY24E EPS. There is room for modest upside but only if corporate earnings do not see material downgrades ahead, according to experts. Corporate earnings for the third quarter were below expectations, led by weak demand environment and macro headwinds.
The US inflation rate, though it slowed its pace compared to the previous month, came in higher than expected at 6.4% YoY, leading to concerns that rates will remain higher for longer.
Among the positives, the government in the Budget has prioritised fiscal consolidation and focused on capital expenditure to achieve higher medium-term GDP growth.
Interest rates are expected to have a softening bias given in-line market borrowing in FY24, further moderation in inflation, peak of global and domestic monetary policy tightness and fairly well-balanced demand-supply dynamics for SLR securities, according to Kotak Institutional Equities.
Flows from investors in domestic mutual funds remain positive, with the latest data showing a renewed pick-up and inflows of over Rs 12,000 crore. Most of these inflows are coming from systematic investment plans where monthly inflows are debited from salaries and are stickier than lumpsum investment or investment in direct equities.