Whoever won in Doklam, India has lost equity edge to China, and how!




During the July Doklam standoff, Chinese people were talking grudgingly on social media about the Nifty’s stellar show in 2017. NSEBSEMotilal OswalLoading data…

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    ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIES NEW DELHI: A peaceful settlement to the Doklam standoff between India and China and friendly utterances from both nations thereafter have significantly eased domestic investors’ geopolitical concerns.
    But India may have just given away an advantage over China in the global market place, as stocks on that side of the border are not as expensive.

    Analysts said after a 19 per cent surge this calendar, Indian equities have lost that relative attractiveness and if emerging markets were to get caught in a bear grip because of any global event – geopolitical or otherwise – foreign investors would side with China, and not India.
    Chinese stocks may be choppy, but valuations are cheaper compared with India’s, they point out.

    While Sensex has risen 19 per cent this calendar, Chinese Shanghai Composite index is up only 9 per cent. India’s m-cap as a percentage of global market-cap stood at 2.6 per cent at the end of August, which was above its historical average of 2.4 per cent.

    “The relationship between portfolio flows to the Chinese and Indian equity markets is complex. Both receive strong flows in bull markets, as global equity investors raise BRIC/EM weights in their portfolios. India benefits from risk diversification out of a slightly wobbly China. Yet, investors may favour China over India in a bear market scenario, especially given rising index weights,” global brokerage BofA-ML said in a report.

    Early data on foreign portfolio investment flows bears it out. FPIs sold Rs 12,770 crore worth Indian stocks in August, after Rs 7,600 crore purchases in July and Rs 3,616 crore buys in June. On the debt front, FIIs have long exhausted their limits in sovereign debt.

    Net capital flows to equity and debt markets China, the world’s second-largest economy and largest emerging market, were negative with some $23 billion outflows in August, said a Reuters report. China is considered an emerging market because of its exceptional growth rate.
    Should the flow trends deteriorate, all eyes would be on Indian mutual fund flows into equities to cushion any sharp fall in the market. Inflows to mutual funds hit a whopping Rs 16,000 crore in August.

    Also, inclusion of China-A shares in the MSCI index may increase volatility of FPI flows to India, the BofA-ML report said.

    “Our China equity strategists estimate $21 billion inflow to the China market after 222 A-shares were included in the MSCI indices between May and August, 2018.

    Full inclusion, which could be 10 years away, will likely attract a whopping $570 billion, it noted, adding that it expects capital flows to India to moderate on rich equity valuations and FPIs hitting the cap in government securities investment.

    During the July Doklam standoff, Chinese people were talking grudgingly on social media about the Nifty’s stellar show in 2017.

    The People’s Daily newspaper on July 26 cited intensive discussions on Chinese social media as to why China’s A-share market has not been able to perform as well as its neighbour’s equity market.

    Brokerage Motilal Oswal Securities says strong macroeconomic fundamentals and continued buoyant domestic liquidity coupled with falling cost of capital has aided the Indian market to remain top performer so far this year.

    “However, another quarter of weak earnings can push the earnings recovery narrative further, even as valuations remain rich at 22.5 times trailing and 19.2 times forward P/E. For valuations to sustain or get re-rated from here on, earnings growth delivery is important, as incremental support from falling cost of capital for a valuation uplift appears to be limited,” the brokerage noted.

    In the emerging market bloc, Brazil (up 18 per cent), South Korea (up 17 per cent) and Taiwan (up 14 per cent) are among the other top performing markets globally in local currency terms.




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