Mayhem in China stocks could bring a windfall for Dalal Street

Mumbai: Indian stocks have managed to withstand the selloff by global investors in emerging markets triggered by China’s regulatory crackdown on some of its biggest companies in technology and education. While domestic equities are being touted as one of the beneficiaries of the market upheaval in China over the long-term, money managers and strategists said they are not in a hurry to lap up stocks here as valuations remain rich and uncertainty around the spread of the virus is yet to recede.

Since July 1, MSCI India is up 1%, while MSCI Emerging Market index is down 7%. The MSCI China index is down 13.8% in this period. China has the highest weightage in the emerging market equity basket.

“India will relatively be a beneficiary. But before we reach that stage, there might be a reduction in FII interest in emerging markets for some time,” said Singapore-based Samir Arora, founder, Helios Capital.

Emerging market equities have been among the popular destinations for investors since November 2020 as easy money policies of global central banks, multi-trillion dollar stimulus from the biggest developed nations and vaccines against Covid-19 boosted their risk appetite. Beijing’s move to clamp down on its companies have rattled global investors.

Mark Matthews, head of research-Asia at Bank Julius Baer, said India will be being a ‘long-term beneficiary’.

“A lot of people will be interested in India who wouldn’t have been before, because India has a good pipeline of new economy companies coming to market. It’s tiny compared to what China has, but material enough nonetheless,” said Matthews.

China’s equity market, due to its size, is high on the allocation of global investors. If regulatory woes from China continue, global investors could consider incremental flows over the longer period.

“China’s weightage is almost four times that of India in the MSCI index. If there is even a small reduction in interest in China, it is a big thing for Indian equities; India has been accepted as a good market and has been doing well individually,” said Arora.

Foreigners have been pulling money out of emerging markets of late. In India, they have sold equities in nine out of the last 10 sessions. India has seen an outflow of $1.07 billion in the last one week while South Korea has seen outflow of $1.77 billion and Taiwan has seen outflow of $1.37 billion. Despite the outflows, Indian stocks have managed to stay afloat thanks to the strong flows from domestic investors.

India will not benefit from China’s tech crackdown in the short term in terms of improved flows, said Christopher Wood, global head of equity strategy at Jefferies.

“In the long term, it would benefit but in the short term foreign investors are already overweight India. Indian markets have done well already. Chinese tech stocks have already discounted the bad news,” said Wood. “I won’t buy Indian stocks on leverage today. I’m just staying invested and I am positive on India. The biggest issue in India is to avoid the new variant, everything else is secondary,” said Wood.