India supplants China as the economic and stock market engine of Asia in the new decade

India supplants China as the economic and stock market engine of Asia in the new decade

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China is losing weight as the undisputed leader of emerging markets and India, its historical rival on the stock market, at the macroeconomic level and on the territorial front, is taking advantage of its weakness to try to supplant it and become the economic engine of Asia, the region with the highest growth and population of the emerging markets. Many analysts and investors have been taking note of China’s relative poor performance vis-à-vis its Indian neighbor for years and have taken action on the matter, focusing their investment on the latter at the expense of Beijing. India’s efforts to capitalize on the deglobalization process that is driving investors away from China, in addition to the potential growth that the country presents, now makes it a more attractive market than China for investors. And the stock market has been proving it for several years now.

China has fallen into a process of increasingly slower growth, something that, as many analysts explain, is inevitable when an economy reaches a considerable size. The decline in Chinese growth is clear: since the Great Financial Crisis, the country’s GDP growth has exceeded 6% year-on-year almost without exception, the target level maintained by the government, since it was considered that, below, the Chinese economy would start to suffer increases in unemployment.

However, the situation began to go wrong approximately 6 years ago, when the drums of trade war due to the arrival of Donald Trump to the White House, they began to ring. Coincidence or not, the reality is that China has not managed to maintain the good pace of the Indian stock market since that moment, and There are analysts who have already given up on the Asian country. “A decade ago we introduced the “Asia Rising” investment theme, with which we focused on the most populous continent in the world, highlighting long-term trends and focusing especially on China’s opening and its integration into supply chains. worldwide,” Julius Baer explains.

The Swiss bank highlights the achievements that China has achieved in recent years, but recognizes that “the Chinese stock market has not managed to replicate the success of its economy” and, more importantly, they have now come to the conclusion that “the time has come to rethink the strategy”, away from China, admitting that “The growth potential is now in other economies, especially India”.

Two opposite paths for the stock market

The behavior of the Chinese stock market in relation to that of India in the last decade is a good reflection of the underlying situation that both economies are experiencing. From the 2008 crisis until Donald Trump’s presidency began in 2017, both markets experienced a strong revaluation, an aggressive rise that left gains of more than 33% in the Chinese CSI 300 index, and more than 47% in the Indian Sensex. Since the arrival of the Covid pandemic, China has definitively lost pace with India, and its stock market has been unable to compete with that of the Indian market: the Sensex has risen 145% from the lows of 2020, a period in which that the Chinese CSI has lost 3.4%.

This has caused the correlation between the Chinese and Indian stock markets to have sunk, reaching historic lows in recent days. “After two decades of high correlation between the two emerging market giants, this was broken in 2021, as India’s strong economic growth and the improvement in its geopolitical climate began a rally that has coincided with the falls in the Chinese stock markets.who suffer from a poor economic recovery and the worsening of relations with the United States,” they explain from Bloomberg.

China’s post-Covid economic recovery is being much more complicated than India’s, with Beijing imposing harsh confinement and isolation measures in recent years that were a drag on the country’s growth, while the rest of the world looked the other way. and left behind the restrictive policies of the pandemic. To this we must add the crisis in the real estate market that has exploded in China, and which is not fully resolved, with especially high levels of debt, in addition to a younger demographics and an older population, in number in India. All this has sunk the Chinese stock market, while the Indian stock market enjoyed an upward rally.

Stronger growth potential

By simplifying the whole tangle of fundamental data and possible prospects for the future of India and China, there is one idea that seems clear and that simply explains Beijing’s loss of weight compared to its neighbor: potential growth. India has better prospects for the future, precisely because it is less developed than China, a reality that some investors have identified and that has convinced them when choosing where to place their money. “With a per capita income that is only one-fifth that of China, India has great potential for recovery, regardless of global economic conditions,” they explain from DWS.

He is not the only one who warns of this fundamental change: “As China emerges from a multi-year economic bubble, India stands out as a compelling alternative for investors seeking exposure to emerging market growth,” explains Norman Villamin, chief strategist at UBP.

The factory of the world loses ground

For years China has been considered “the factory of the world”, due to its enormous production and export of goods outside its borders. Now India is starting to overshadow China, and analysts are recognizing it. “Growing skepticism in the West about exclusive dependence on China for some products is increasing India’s attractiveness as a destination for foreign direct investment,” says Elke Speidel-Walz, Chief Emerging Markets Economist at DWS.

This trend explains part of the weakness that the Chinese stock market has shown against India since Donald Trump and its trade war policy China made an appearance. “The emergence of an era of deglobalization, moving away from centralized manufacturing in China, adds new impetus to India’s domestic policy approach. This shift could reflect China’s foreign investment boom in the 1990s as industries moved from the West,” says Villamin. “India’s domestic politics offer tailwinds for its economic model as the nation enters a phase of investment focused on physical and digital infrastructure, similar to that of China in the 1990s”highlights the expert.

Thus, it seems that India has decided to follow China’s example and use it to overtake it on the right in economic terms. And it’s not just about investment in the production of low-value-added goods: “Indian technology companies, world leaders, are already providers of well-integrated technological services for many leading multinationals. These types of businesses also appear to be well positioned to benefit from artificial intelligence (AI) as another secular trend,” they explain from DWS.

Patricia Urbano, manager and emerging markets specialist at Edmond de Rothschild AM, highlights how “India has focused on becoming a manufacturing alternative to China. It offers advantages due to its geographical position, such as proximity to the Asian supply chain, a good supply of qualified personnel and a large internal market. And it has also taken advantage of its import substitution policy make in India“he points out.

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