Nicholas Spiro

Macroscope | Why amid a short-term rush to China, investors should still buy India

The ‘buy India, sell China’ trade has gone into reverse in stock markets, following Beijing’s faster-than-expected unwinding of ‘zero-Covid’

However, the confidence in China’s ability to pull off an orderly exit is low, while India has good growth prospects – if the global outlook holds up

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Garment workers cut fabric to make shirts at a textile factory in Hindupur town in the southern state of Andhra Pradesh, India, on February 9. Unlike other major economies with ageing populations, India enjoys a demographic dividend with its army of young workers. Photo: Reuters

Nicholas Spiro

Published: 9:30pm, 15 Dec 2022

This has been an annus horribilis for stock markets the world over. The MSCI World Index, a gauge of shares in advanced economies, is down 16 per cent, while its emerging market counterpart remains in a bear market, having lost 21 per cent.

Equity markets are not alone in having suffered sharp declines. Every major asset class, with the notable exception of commodities and the US dollar, has been pummelled by a combination of steep rises in interest rates, stubbornly high inflation and the threat of a global recession.

Given such a bleak economic and financial backdrop, the rapid ascent of India’s stock market, which hit an all-time high on December 1, is striking, potentially presaging a major shift in asset allocation in emerging markets in the coming years.

The BSE Sensex, a gauge of India’s biggest companies, has risen 7.6 per cent this year. Although the MSCI India index, which is tracked by international investors, delivered a negative return of 2.6 per cent in dollar terms in the first 11 months of 2022 due to the plunge in the rupee, this compares with a negative return of 19 per cent for the benchmark MSCI Emerging Markets Index.

There are several reasons for India’s stunning outperformance. Strong domestic demand – turbocharged by the reopening of the economy following last year’s devastating Covid-19 outbreak – has kindled optimism about corporate earnings. Retail investors have poured money into India’s stock market, helping offset the largest ever annual withdrawal of capital by foreign institutional investors. Moreover, many investors are attracted to secular trends driving growth in Asia’s third largest economy.

Yet, the factor that has worked in India’s favour the most this year has been the dramatic deterioration in sentiment towards China, India’s biggest economic competitor. The damage wrought by Beijing’s zero-tolerance approach to the Covid-19 pandemic – which added to concerns over regulatory crackdowns and escalating geopolitical tensions – coincided with growing evidence that India is benefiting from a series of reforms and shifts in the drivers of global growth.