Shift of axis from Indian markets: FPIs pivot to China as it unlocks

Rate hikes, elevated valuation, and China reopening lead to reallocation of funds

India’s valuation premium, elevated interest rates, and China’s reopening are leading to the reallocation of funds by foreign portfolio investors (FPIs), say industry observers. So far this month, overseas funds have dumped domestic shares worth nearly $2 billion. China, on the other hand, has received billions of dollars of foreign flows, according to reports. Unlike India, China doesn’t report FPI investments on a daily basis.

According to a Reuters report, foreign investors bought a net 41 billion yuan ($6.06 billion) of Chinese stocks via the China-Hong Kong Stock Connect trading platform so far this year, compared with 90 billion yuan of China stocks bought in 2022. They bought a net 35 billion yuan of Chinese stocks in December. On a year-to-date basis, Hong Kong’s Hang Seng has risen 9.1 per cent; the Shanghai Composite has risen 4.4 per cent. The Sensex and the Nifty fell 0.3 per cent.

“With China unlocking, a lot of money will move from India. Even if investors are not spending in China, they will look for alternatives, given our earnings may not be as projected. We will see continuous selling from FPIs. This year will be challenging, in terms of FPI flows. The situation may be more benign when the US goes through a recession and flows return to India,” said Nischal Maheshwari, chief executive officer-institutional equities, Centrum.

Analysts believe more money flowing into Chinese equities in the months to come will weigh on other relatively expensive markets in the Asian and emerging markets (EMs) like India. India’s benchmark indices trade at more than 60 per cent premium to their Chinese counterparts.

Analysts argue there is scope for only a slight narrowing in India’s valuation to other EMs, given the high growth potential.

“We are growing at a much bigger rate than any other large economy,” said Saurabh Mukherjea, founder, Marcellus Investment Managers.

Meanwhile, some question the sustainability of flows into China.

“The unlocking has seen a gush of foreign investor flows into China. But one has to see how sustainable this is. China’s Covid restrictions seesaw all the time. India’s Covid situation is stable and is a growing economy. After some correction in valuation, FPIs will start investing in India,” said U R Bhat, co-founder, Alphaniti Fintech.

Most foreign brokerages, however, remain more bullish on China’s prospects.

“China’s economy will rebound strongly from the second quarter after a bumpy transition period, with the momentum to carry into next year. We have seen strong signals from the government to stabilise the housing market and boost domestic consumption as a priority. Pent-up demand will dominate the reopening story,” said Jing Liu, chief economist, Greater China, HSBC, in a note.

HSBC has an ‘overweight’ stance on Chinese equities.

Chinese markets have entered bull-market territory, surging more than 20 per cent from end-October.

“We are now more bullish on China’s growth recovery, given faster reopening, stronger housing support, and technology regulatory easing,” Morgan Stanley said in a note last week.

Among EMs, Morgan Stanley has an ‘overweight’ stance on South Korea, Taiwan, and China.