Reasons why money fleeing Chinese stocks may avoid Indian markets?

The world has been shaken by the waves of Covid-19 pandemic and despite the immunization program being carried out at a frantic pace, the fear of relapse does lurk on the horizon.

Covid-19 Coronavirus Pandemic - Free photo on Pixabay
World Affected by Covid-19 Pandemic

I would try to answer the question in two parts as we need to understand the flight of money(China) and avoidance of the market(India)

Multiple reasons why money is exiting the Chinese market

  • Crackdown on the edtech/tech sector for storing data domestically and having a stronghold on the companies of the CCP(Chinese Communist Party)
Crackdown by Chinese Regulators
  • Spread of Novel Covid-19 Virus (Delta Version) in the majority of the provinces
Spread of Covid-19 (Delta Version) in China
  • The U.S. doesn’t want American investors to buy Chinese stocks.
US wants to limit capital availability to Chinese companies
  • The crackdown has made a lot of Chinese stocks look cheap which can correct further if the CCP crackdown continues
Shanghai Composite Index

Multiple Reasons why money is exiting China may not enter India

Since the lows of April 2020, the markets have risen by almost 100%

Nifty 50 Index performance since fall in April 2020

The rise in the index is in no way an indicator of earnings or reversal of capex trends for many companies who were impacted by Covid-19 restriction and lockdown in Wave-1 & Wave-2.

NSE Nifty 50 Index will fall to 15,500 by the end of June 2022, 5% lower than the value of August 6th, 2021.


UBS Group AG

There is a possibility why this might happen:

  • Possibility of a third wave that can disrupt all sectors
Covid-19 third wave possibility in India
  • Missing of Earnings for companies in the coming quarters. In this quarter, 58% of the companies have missed analyst estimates. This trend has led to earnings exuberance being continuously revised over the decade
Earnings missing estimates repeatedly
  • The exit of FII(Foreign Institutional Investors) owing to better pricing in other markets, valuations in the Indian Market, and recovery uncertainty. FIIs have pulled out $1.7 billion from local shares in July paring their net purchases for the year
FIIs have been investors & sellers depending on sentiment
  • Increase in the interest rates by the US Federal Reserve providing investors better returns for lower uncertainty
US Federal Reserve focusing on tapering the money flow to avoid inflationary pressure
  • Rich valuations are a deterrent for new investors to put in money. The MSCI Emerging Markets Index is trading at a multiple higher than 13 times.
MSCI Cumulative Index Gross Returns Comparison
MSCI Emerging Market & MSCI India Performance over the years

Hence, it is better to sit on money as the Index is climbing and wait for opportunities to buy stocks that are resilient in the post-Covid era and can grow organically.

Hope you find this helpful

Also, you might like to go through some other posts as part of my content (Gurudatt Rao) or on my blog (Lateral Thinking)

Happy Investing!

References:

  1. China’s Crackdown Has Made Its Stocks Cheap. But Should You Buy?
  2. Xi is strangling China’s booming online tuition business. National security is one reason
  3. 3 Reasons to Sell Your Chinese Stocks, and 3 Reasons to Hold Them | The Motley Fool
  4. China Reports More COVID-19 Cases, Some Cities Kick Off New Tests
  5. Money fleeing China stocks may snub Indian markets due to these 3 reasons
  6. Money fleeing China may avoid Indian stocks as they’ve become pricey, UBS says
  7. https://www.msci.com/documents/10199/1ad792ce-3199-445c-8be3-f2a035ac782d

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