Asian equity focus

Asian equity – Indian equity growth as flows to China fall

China has been a significant driver of global growth accounting for 35% of nominal GDP growth over the past 15 years according to the IMF and UK investors looked to investment opportunities as net retail sales to funds investing in China grew. However, since the pandemic, the fortunes of the Chinese economy have been much more mixed and IA data show that since 2023, retail investors have been turning to India as confidence in the performance outlook for India has been building.

Over the 15 months to the end of Q1, Indian equity funds under management grew 43% and net retail sales are £647 million, compared with 2022 when sales to the India/Indian Sub-continent sector were flat with £1 million outflow. In contrast, Chinese equity funds faced steady outflows that have extended into the first quarter of 2024. Over the 15 months to the end of March 2024 investors pulled a net £406 million from the IA China/ Greater China sector.

Indian equities have benefitted from the country being the fastest growing major economy through 2023, with GDP increasing 8.4% year on year. Manufacturing continues to play a significant role in Indian growth, supported by concerted government efforts. With increased attention to the risk geopolitical conflicts can have for global supply chains India is, as the world’s largest democracy, positioned to benefit from ‘friendshoring’ – the relocation of supply chains to friendly states. Whatever the outcome of the Indian election, Modi’s policies have been pro-business and attracting foreign investment. Over the longer-term India also benefits from youthful demographics and an expanding middle class.

Although China has not had to grapple with the escalating inflation that has hampered other markets, economic growth has still weakened since 2021 and this has affected investor sentiment. The impact of strict and long COVID-19 lockdowns affected the speed of the Chinese economic recovery and contributed to the slowdown in consumer spending. Weaker demand from overseas consumers for Chinese products has not been helped by war in the adjacent Middle East. Supply chains have also started to diversify – which has loosened supply chain dependency on Chinese exports. The Chinese property market slump has been a well-publicised challenge to growth.

The performance of Chinese stocks since 2021 shows cumulative returns for the MSCI China index of -41.8 over the last 3 years and in the Chinese tech sector we have seen falling valuations in contrast to the US-listed Magnificent 7 stocks that over 2023 have shown strong performance.

If Chinese equities are to return to favour, investors will be looking for consistent and supportive fiscal policy, a stable and fair regulatory environment, and a supportive stance towards overseas investment in Chinese companies. China’s planned fiscal stimulus package for 2024 of 11.1 trillion yuan is welcome in helping to meet China’s 5% economic growth target for 2024 but investors are also looking to see that China can manage the budget deficit and ease its local government debt risks.