In recent weeks, China’s stock markets have experienced an extraordinary surge, giving rise to a fresh debate among analysts and investors. Some professionals are advocating for a strategy encapsulated in the phrase ‘Sell India, Buy China.’ This perspective suggests that foreign investors may be shifting their attention to Chinese markets, influenced by the relatively low valuations in China compared to the soaring valuations observed in India.
Market Sentiment: A Shift in Focus
According to research from Elara Capital, a concerning trend has emerged: approximately 90 percent of the leading 30 emerging market (EM) funds are currently underweight on China, indicating a belief that Chinese stocks may lag behind other investments in performance. The report highlights that a staggering 28 out of the top 30 EM funds have reduced their exposure to China, while around 80 percent of the top 450 EM funds also remain underweight on the Chinese market.
Declining Allocation to China
This significant reduction in investment reflects the lowest allocation of active funds to China seen since 2017. Currently, the allocation stands at about 19 percent, a dramatic decrease from the peak of 38 percent in October 2021. This data serves as a critical indicator of broader market sentiments and investor behavior towards China, which merits close observation.
Recent Gains in China’s Stock Markets
Amid this backdrop, China’s stock indices have registered substantial gains. In response to consecutive announcements detailing economic support measures from the government and the People’s Bank of China, the Chinese stock markets have experienced a remarkable rally. The Shanghai Composite Index has surged approximately 25 percent, while the Hang Seng Index has risen by about 22 percent over the past week. In stark contrast, Indian markets and many other global indices have seen an increase of less than 2 percent during the same timeframe.
Impact of Foreign Investments
Elara’s report also sheds light on the recent uptick in foreign direct investment in China, which has soared to $992 million following the announcement of new market stimulus measures— the highest recorded level in 14 months. This influx of capital comes alongside strong domestic investments, particularly notable since May 23 this year. In February, a period marked by significant selling pressures in the Chinese stock market, foreign investors had drastically reduced their positions.
Conclusion: The Evolving Investment Landscape
The current trends indicate a complex investment landscape characterized by a potential shift from Indian markets towards China. While the argument for ‘Sell India, Buy China’ gains traction among some investors, it remains critical to approach these developments with caution, recognizing the inherent risks and volatility within both markets. Monitoring ongoing economic policies in China and their effects on stock valuations will be essential for investors looking to navigate this changing environment effectively.
