The ‘sell India buy China’ narrative has been gaining momentum lately and as the Indian markets continue to be in pause mode after the sharp correction earlier this month, the question is does China offer better value now? The MSCI China has outperformed MSCI India Index in the past couple of months. But Nomura says they do not expect it to be “long-lasting” though there is “scope of near-term outperformance of China over India.” The brokerage firm has retained its Overweight stance on India in its Asia-ex Japan portfolio while maintaining Neutral rating on China.
Nomura sees near-term risks in India
Explaining their India stance, Nomura stated that, “On India, we retain a structural overweight call, but believe that there remains a risk of further multiple compression due to the positive China narrative, and local factors. We think peak dollar could catalyze renewed interest in ASEAN-4 markets.”
They outlined, the key near-term risk in Indian markets include, “further multiple compression and some earnings downgrade risk.” Valuations is one of the key concerns. It is still elevated according to them at “at 21x for MSCI India Vs average valuation of 19.6x/21.5x between 2015/2022.” the report stated.
They believe though the valuation recalibration has been playing out and the markets are at significantly lower levels compared to 24x in last October, the “the optimism on China post-DeepSeek, and investors having an alternative in China, we see scope for further multiple compression in the near-term.”
According to them, “the positive narrative on India is also being tested amid a slowing economy and earnings downgrades, tight banking sector liquidity, some tariff risks from the US (Vs a consensus view that India might be almost unharmed); and a weakening and underperforming rupee.”
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This is further exacerbated by persistent and heavy “net-selling from foreign investors,” Nomura added. Across the secondary market, they pointed out that “India-dedicated offshore equity funds and offshore-listed ETFs are creating a vicious spiral.” While foreign ownership, in percentage terms, is now at a decade low of 16% (end-Jan 2025), foreign investors still own $782 billion of Indian stocks (end-Jan 2025), “which still appears elevated compared to pre-pandemic levels, suggesting scope for more net-selling ahead so long as the positive China narrative stays in place,” Nomura highlighted.
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