Chinese bazooka pulls FIIs away from Nifty, test retail investor's faith

Emerging market investors, who minted money following the mantra of 'Buy India, Sell China' in the last 2 years, are now beginning to take reverse steps following Beijing's bazooka stimulus for rescuing the economy and markets.

After languishing against other EM peers, the Chinese stock market has roared back to life with CSI300 jumping 25% in one week and Hang Seng rallying 16%. On the other hand, both Nifty and Sensex have been under selling pressure with FIIs pulling out more than a billion dollars in Monday's trade when Sensex ended nearly 1,300 points lower.

While institutional investors are worried about peak valuation in a retail investor liquidity-led rally on Dalal Street, FIIs now have enough reasons to buy the Chinese resurgence story - large stimulus package, cheap valuation and underweight stance.


"India has performed strongly and we are looking at other markets. China and ASEAN could actually outperform. India is actually quite a domestic liquidity market," Joanne Siew Chin of DBS Group said.

The Singaporean financial services firm is of the opinion that India will underperform China for the rest for 2024 after the government announced a swathe of monetary and liquidity measures and pledged more fiscal support.

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To free up liquidity, China has reduced the reserve ratio for banks by 50 basis points. It has also reduced the mortgage rate for existing housing by 50 bps - the move will boost consumption demand. Besides, the People's Bank of China also signalled policy easing in the near term.

"Feedback from investors, and assessing some market indicators suggest that, this time around, the rally might be more sustainable relative to previous start-stop rallies. As we noted in the past, investors have been underweight HK/China stocks, and this may cause many of them to chase stocks to neutralise those positions. We suspect that many of the China bulls will likely also emerge from the long winter hibernation," said Chetan Seth of Nomura.

India's weight in the MSCI AC World Investable Market Index had recently surpassed that of China's, giving FIIs enough headroom to reallocate.

The cheap valuations of Chinese stocks are also keeping the momentum intact. "This can prove to be a tactical trade which can sustain for some more time. This means FIIs may continue to sell in India and move some more money to better performing markets. FII selling is unlikely to impact the Indian market significantly since the massive domestic money can easily absorb whatever the FIIs are selling," said Geojit's Dr. V K Vijayakumar.

Analysts at Kotak Institutional Equities noted that FII inflows in India have been more of the passive variety and that active FIIs may look to deploy incremental inflows into China.

"However, we doubt active FPIs will sell a meaningful portion of their stock in India and move the same to China. Passive or ETF incremental inflows from GEM ETF funds may see some moderation. We note that any change in the relative weights of the two countries in various benchmark indices will only affect incremental flows from GEM ETF funds," Kotak said.

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