India vs China Race: One step forward

Fifth largest economy, fastest growing emerging country, poised to become third largest economy by 2030- these are a few adjectives anyone would define India by. The list doesn’t end here. Hi, In today’s episode of Indian markets reaching new heights, we will discuss India achieving its not surprising yet gratifying milestone recently. 

In our last newsletter, we discussed how even though India hasn’t become a $4 trillion economy yet, it achieved $4 trillion market capitalization. With this, India overtook Hong Kong Stock Exchange and became the seventh largest trading venue in the world. As of the end of November, the total market capitalization of the National Stock Exchange of India was $3.989 trillion versus Hong Kong’s $3.984 trillion, according to data from the World Federation of Exchanges. A trillion dollars have been added in just the last three years.

                                                            Source: Financial Times

It would be fair to say that a plenty of factors have worked in favor of India and at the same time a plenty have conspired against China. Though the problems started long back with the US China trade war and accelerated with Covid 19, I’ll try to keep it as short as possible. Rather than having a theoretical discussion on this, we’ll discuss facts and data. So let’s begin.

Before discussing what led to China where it is today, let’s review performance of both the indexes. 

While Nifty has gained approximately 13.5% in the last one year, Hang Seng has fallen by almost 17%. Looks bad right. If the left chart has left you dumbfounded, there’s another one- the right one. This chart compares the performance of both the indexes in the last 5 years. 95% gain in NIFTY50 vs -37% downgrade in Hang Seng. Essentially it means that if one had invested in China’s index, he would have not gained anything but wealth erosion. 

This was all about the performance of the two indexes. Lets now talk about the investment flowing in both the countries in the form of Foreign Portfolio Investments. 

Source: CEICDATA.com

Although the scale is very different for both the charts, we can see the difference between the two. Recently, FPIs have started pulling out their money from China and investing in emerging countries like India especially on the back of China plus one. Not even investors, even large MNCs are shifting their base from China to India, prime example being Apple. Apple, which has the bulk of its manufacturing base in China, has asked component suppliers to source batteries for the upcoming Iphone 16 series from India. This is huge for India as China’s manufacturing wave kind of started with Apple only. 

Let us now look at a few pointers that underscore the reasons behind people, foreign investors and the word believing in India’s potential.

Outlook: Rising high reaching the sky

Moody’s Investor Services recently retained India’s economic growth forecast at 6.7% for 2023, citing the country’s remarkable resilience amid a global slowdown buoyed by solid domestic demand.

Moody’s recognizes upside potential if economic momentum continues. However, inflation risks remain as below-average monsoon rainfall is forecast, which could push up food prices. Agricultural commodity costs may also rise with a potentially strong El Nino effect in late 2023 and early 2024. The RBI left interest rates unchanged at 6.5% in August due to robust domestic demand. Barring a spike in core inflation, interest rate hikes are unlikely given India’s solid economic activity levels. All of this feels like the same old story right? I won’t bore you with it more. Let’s have a look at some interesting pointers.

Election Euphoria

The Indian stock market presents a favorable situation for investing with over $150 billion added to the economy in recent years due to stable political leadership. The BJP gained over 55% of votes in states like Madhya Pradesh, Rajasthan, and Chhattisgarh, creating confidence as political stability is key for attracting both domestic and foreign investors. 

The country’s GDP expanded 7.2% in the last financial year while the manufacturing sector grew 8.2%, underscoring the resilience of the economy. Foreign fund inflows into the stock market have increased by a sizable $5 billion in just the last quarter. All available analysis and data points to the Indian equity market providing investors a healthy expected return of 11-16% over the next year, supported by political certainty and continuity, macroeconomic fundamentals, and renewed global optimism toward emerging markets like India.

Demographic Advantage: We have the power

India’s population surpassed China’s this year to become the most populous country globally. While China faces challenges from a rapidly aging population, India benefits from its young population structure with a median age of 28 years. Rapid economic growth is driving India’s emergence as a major power, though its GDP remains smaller than China’s currently. Experts believe India’s demographic dividend from its large working-age population can be leveraged to accelerate development further.

What went (is) wrong with China?

China’s economy is slowing down because population growth has slowed down much faster than one would have imagined.It’s economy is facing serious problems, with growth slowing sharply. The property sector, which accounts for over 25% of GDP, is in crisis after sales by China’s largest developer Evergrande plunged over 90% last year to $3 billion. Evergrande has $300 billion in debt and spent the past year stumbling from one missed payment deadline to the next. 

The second company is Country Garden, among the biggest real estate developers in China, which too defaulted on its international debt payments.The company, which has an estimated 3,100 housing projects across China, saw its market cap shrink from a peak of $50 billion in 2018 to $3.5 billion in August this year.Deflationary pressures are rising as exports, which make up 18% of the economy, fell 4% in November as COVID lockdowns disrupted factories. 

China’s authoritarian government maintains strict control through rigid policies and censorship. This political inflexibility is an added headwind for the once rapidly growing global economic superpower. I can go on and on about China’s current economic situation and how everything that is wrong with China could make India the next global superpower. They say Actions speak louder than words, hence it will be our actions that’ll show the world the power that India holds. 

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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use.