China’s MSCI-fuelled gains may be India’s loss

The Chinese and Indian equity markets could be heading in opposite directions as the former becomes more accessible to foreign investors and the latter less so.
China’s MSCI-fuelled gains may be India’s loss

MSCI's detailing this week of the individual Chinese stocks that will be added to the MSCI Emerging Markets Index from June 1 has put the spotlight not just on China but also on regional economic rival India, albeit for the wrong reasons.

While Chinese equity markets are preparing for a big influx of capital from global asset owners, India’s stock market is feeling the pinch due to recent policy decisions that could discourage greater foreign participation, some institutional investors say.

Among them is the Canada Pension Plan Investment Board, whose enthusiasm for Indian stocks is being tempered by a mix of high share price valuations and “less constructive” government policy decisions, according to Amy Flikerski, a senior portfolio manager at the pension fund.

India and China are not directly comparable, but they are locked in a struggle to establish their own economic and political spheres of influence and are among the fastest-growing big economies in Asia.

And on current reading it would appear that India's draw is dimming while that of China might be growing brighter.  

Recent developments, such as a new market tax, have placed India on the back foot with foreign investors, delegates at the CFA Institute annual conference in Hong Kong heard on Tuesday.

In February, India announced it would tax long-term (defined as holding periods of more than one year) gains exceeding Rs100,000 ($1,475) arising from the transfer of listed company shares/equity-oriented fund/units of business trust from April 1 2018. The new tax applies to all investors – local and international.

“The long-term capital gains (LTCG) tax has certainly put a wrench in our thinking about India,” Flikerski told delegates at the event.

So although Flikerski remains positive about the country’s long-term prospects, she thinks currently there are better investment opportunities in India in infrastructure, real estate and possibly private credit, rather than in equities.

Carl Huttenlocher, founder and chief investment officer of alternatives investment firm Myriad Asset Management, questioned whether it was wise to stymie portfolio capital flows given India's economic backdrop.

“The 10% LTCG tax comes to a market that has twin [budget and current account] deficits and needs foreign funding,” he said.

He expects that some US investors who were previously more comfortable investing in India rather than China because of the relatively lower cultural and language barriers, could now start shifting allocations in favour of the latter.

“I am quite negative on the outlook [for the Indian stock market] directionally and for the [rupee] currency,” Huttenlocher said.

Adding to the growing discontent was a move, also in February, by three Indian stock exchanges to terminate agreements that allowed index derivatives based on their market data to be traded or settled on overseas exchanges.

MSCI strongly criticised the decision as “anti-competitive” and said the step would restrict access to the Indian equity market for international institutional investors.

The index provider has said it will consult with global investment managers before deciding if a change in the market classification of the Indian market in MSCI indexes is warranted. India accounts for around 9% in the MSCI Emerging Market series of indices.


Both India and China are saddled with growing piles of bad debt in the banking system but India faces additional economic and political headwinds this year.

Among them is a pickup in inflation that could yet spur the Reserve Bank of India to raise rates.

"While company results have so far been good, there is growing discomfort on the macroeconomic front," Anita Gandhi, an executive director at Arihant Capital told AsianInvestor recently.

Markets are also likely to experience some volatility due to a busy electoral calendar, with eight state elections scheduled for 2018 and a general election that must be called by April/May 2019. There are concerns that India's economic reform programme could face disruption if Prime Minister Narendra Modi's investor-friendly administration loses these.

No such worries for China though, where President Xi Jinping has installed himself as president for life – a move that could ensure greater political stability and policy continuity, even if it leads to more “key man” risk in the longer term.

Still, not everyone believes India's chances of attracting foreign capital are shrinking.

Avinash Vazirani, fund manager for emerging markets at Jupiter Asset Management, believes that it's important not to overlook the considerable progress made since the 1990s, when India's capital account was liberalised.

“Since the Modi government came to power in 2014 there has been a further slew of positive reforms; foreign investment restrictions in several industries (including airlines, retail, defence and asset reconstruction companies) have been relaxed or removed entirely, and last year we saw the government easing restrictions on foreign investment in corporate debt and interest rate futures,” he told AsianInvestor.

“We also think that significant domestic reforms such as the recent implementation of a country-wide goods and services tax, and the announcement of a new government healthcare insurance scheme, are not only beneficial for the country but also provide foreign investors with a wide range of opportunities for investment.”

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