In recent weeks, several factors have prompted foreign portfolio investors (FPIs) to divest from Indian stocks, selling over ₹30,000 crore in the first four trading days of October. Key developments include escalating geopolitical tensions in West Asia, which have driven crude oil prices up by 18% to around $80 per barrel, as well as stimulus measures introduced by China to boost its economy. Amid these dynamics, Indian markets are trading at lofty valuations, with a one-year forward earnings ratio of 23x.
Some analysts now recommend that investors steer clear of Indian equities in favor of Chinese markets in the short to medium term. They anticipate that the underperformance of Indian stocks compared to their Chinese counterparts will be temporary. Analysts at Nomura noted, “Renewed interest in Chinese equities, driven by recent monetary and liquidity measures, coupled with expectations of further fiscal stimulus, suggests a risk of near-term underperformance for Indian stocks relative to the broader Asia-ex-Japan index (AeJ). However, this is unlikely to be a long-lasting trend, as India’s structural growth story remains compelling.”
Conversely, the Financial Researcher advises absolute-return investors to avoid the Indian market in light of recent developments, particularly China’s stimulus efforts. They project that foreign investors will increasingly favor Chinese stocks over Indian ones in the coming months, due to significant support from Chinese authorities and the relatively low valuations in that market. “Dedicated emerging market (EM) and Emerging Asian equity portfolios should shift India from neutral to underweight. We maintain our recommendation for a relative equity trade,” they stated.
Concerns about India’s economic outlook are growing, with indications of a potential slowdown driven by credit deceleration and fiscal tightening. The researcher highlighted that fiscal spending—excluding interest payments—is rapidly contracting, signaling challenges ahead for corporate profits and earnings multiples in India, which are currently at record highs. “The credit impulse has turned negative, constraining household spending and corporate investment,” said Budaghyan, suggesting that Indian corporate profits may further decline due to ongoing tight monetary and fiscal policies.
Valuation concerns are also pressing. Budaghyan noted that Indian stocks are overvalued by two standard deviations compared to their historical averages and by 1.5 standard deviations relative to their EM peers. “Such extreme valuations make the Indian market susceptible to significant sell-offs triggered by any global or domestic event. Even a minor disappointment in profits could lead to a sharp drop in share prices,” the Financial Researcher warned.
As the narrative around China shifts following recent stimulus measures, global investors are likely to take notice of the Chinese markets. The Financial Researcher pointed out that as China’s market rallies, pressure on India is expected to increase, especially given its slowing economy and high valuations. “Liquidity will be ‘sucked out’ in this context,” they stated.
Investors are cautiously optimistic that China will take necessary steps to stimulate growth, though challenges remain, particularly around the demand for money rather than its supply. Viktor Shvets, head of global desk strategy at Macquarie Capital, concluded, “While we still prefer India’s long-term outlook, China’s struggle with high savings rates presents significant challenges.”
