camila December 5, 2021

(Bloomberg) In a change of tone over the world’s two biggest emerging markets, global investors overseeing billions of dollars are slowly starting to favour China over India – reversing a year-long trend that has pushed stocks in opposite directions.

BlackRock has upgraded Chinese stocks as policy hurdles ease, saying “the time to position in China is now”, while trimming its exposure to Indian equities.

Goldman Sachs Group and Nomura Holdings both downgraded Indian stocks recently, with the former upgrading offshore Chinese equities at the same time.

Valuations are the key rationale as losses triggered by Beijing’s wide-ranging regulatory crackdown have made Chinese equities relatively inexpensive while shares in the South Asian nation appear expensive after a world-beating rally.

“There is more opportunity to allocate to China as the performance disparity between the two countries is one of the largest on record,” said New York-based portfolio manager Tom Masi of GW&K Investment Management, who recently trimmed his India positions.

The pivot towards China comes amid growing optimism that its battered equities have factored in the worst of Beijing’s rein-tightening that at its most extreme wiped off as much as US$1.5 trillion (S$2.05 trillion) in value.

That said, an economic slowdown and a property market crunch are among factors that make being bullish on China a brave call.

For BlackRock, the world’s largest asset manager, the positive sentiment is based on the view that monetary policy in China will likely be accommodative next year and economic growth could be better than expected, said Ms Lucy Liu, BlackRock’s portfolio manager for global emerging markets equities, in a recent briefing.

BlackRock moved China to a more neutral position from underweight, and narrowed its underweight call on Internet services companies.

Meanwhile, it is booking some profits on Indian shares.

Sell-side analysts also seem to agree. The MSCI China Index is seen advancing 39 per cent over the next 12 months while the Indian counterpart is estimated to have less than half of that upside, according to analyst estimates compiled by Bloomberg. And it is not hard to see their logic: The China gauge has trailed India’s this year by over 40 percentage points – set to be the most since 1999.

Indian stocks, which more than doubled from March 2020 lows aided by record low rates and a retail investing boom, have lost momentum in recent weeks. That is amid concern over tightening liquidity conditions and inflation in one of the world’s biggest oil-importing nations.

Sentiment towards new listings has also soured after digital payments start-up Paytm, India’s largest initial public offering, flopped in its debut on concerns over pricey valuations. Foreign funds are also selling, having withdrawn US$1.3 billion this quarter, compared with inflows of US$8.5 billion over the first nine months of the year.

“There may be a valuation correction in the short term as India wrestles with higher energy prices,” said Mr Masi.

“The failure of Paytm is an early indication of the limits of valuation.”