How China's Golden Week Market Rally Weighs On India

The only reason for India's stock market to rally in coming days would be the short term oversold reading of several technical indicators. Otherwise, the sensational breakout given by the Chinese markets, which were lagging for nearly a decade, will keep any incremental foreign money flows away from India. In terms of price to earnings (PE) multiple, which is the widely used matrix to track the market valuation, China's market was trading at a historic low PE of around 9 compared to India's Nifty PE of around 23. Hence, when China recently announced a stimulus in terms of rate cuts and other fiscal measures in a bid to lift a weary property sector, stoke consumption and revive capital markets, India's stock markets fell sharply while China and allied markets rallied. This trend is likely to continue for the near term, experts believe. The total size of China’s stimulus package this year, including plans announced last week, is estimated to be about 7.5 trillion yuan (US$1.07 trillion), or equivalent to 6 per cent of the country’s GDP in 2024, as per a note from Deutsche Bank.

Sensex has crashed over 4,100 points in just five trading sessions as the double blow of the Iran-Israel war and China's stimulus package unleashed a bear attack. Since September 25, Sensex and Nifty have declined by around 5 percent even as China and Hong Kong markets rose more than 20 percent. While the Chinese markets witnessed their best two days rally last week since 2007, Sensex and Nifty recorded their worst week since June 2022 as they ended the week with a loss of 4.3 percent and 4.5 percent, respectively. The fall in Indian markets was fast as hedge funds and index funds that bet on market momentum were quick to withdraw funds from India and pump it into China. Hence, more than the bear attack in India's markets, it was the genuine flow of money from index funds and hedge funds that led to fall in Indian markets. Notably, the Nippon India Hang Seng ETF, the only fund in India tracking the Hang Seng index, was locked in the upper circuit on October 4.

Data from Indiacharts shows that foreign portfolio investors (FPIs) unwound more than half of their long bets in India's equity derivative markets as their positions came down from more than 3 lakh net long contracts to below 1.25 lakh contracts last week. In the cash segment, FPIs sold stocks worth more than Rs 40,000 crores in India as they found the valuation of Chinese stock much more attractive. The Hang Seng China Enterprises Index gained 36 percent since last month’s low and some stocks witnessed astronomical gains as share prices more than doubled in a matter of days.

As the momentum continues in Chinese stocks, FPIs may continue to sell in India where valuations are elevated. But it remains to be seen how long the optimism in China lasts.

India's Steel Stocks
For the past few years, China was flooding the global markets with steel. But the scenario completely changes after the massive stimulus. China last week announced measures to prop up demand for real estate in the country. These include lowering existing interest rates for home loans and easing restrictions for buying property. China is the world's largest consumer of steel and a slowdown in its real estate sector has led to the country selling its surplus steel across the world at discounted rates. But now the stimulus will drive up domestic steel demand in China, which may help reduce pressure of the Chinese steel exports that were flooding the global markets. In that sense, India's steel stocks become an attractive bet. It is this reason that even though Sensex and Nifty fell by around 5 percent in the past week, the share price of steel company stocks remained unaffected.

Brokerage firm Morgan Stanley has upgraded the ratings of JSW Steel and Jindal Steel and Power from 'equal-weight' to 'overweight,' while also raising Tata Steel’s rating to 'equal-weight' from 'underweight.' Meanwhile, Nomura India has initiated coverage on JSW Steel and Jindal Steel with a 'buy' rating, reflecting growing confidence in their market positions. SAIL could be a top pick for brokerages in the Public Sector steel manufacturing space.

"Potential stabilisation of the economy, especially the property market, may support steel demand in China, thereby boosting not just sentiment but also steel/ steelmaking raw material markets, we believe," Rahul Gupta of Morgan Stanley said in a report last week.

US Elections
If the Republicans led by former US President Donald Trump make a comeback, it would be advantageous to India. This, since the Republican regime is considered to be aligned with the Narendra Modi led BJP government and hence the return of Donald Trump would be perceived positively for Indian equity markets by large investors. On the other hand, if the democrats return to power, market sentiments in India may remain subdued since the Biden administration has time and again displayed a lack of bonhomie towards the Modi government. Hence, the outcome of the US elections in November may largely determine the further course for Indian stock markets in the long to medium term scenario.

Otherise, India's fiscal scenario has never been better than now as its forex reserves have risen to new lifetime highs of US 705 billion with the country becoming only the fourth nation globally to have forex reserves of more than $700 billion. India's reserves first exceeded $100 billion in December 2003, taking over three years to add the next $100 billion. The increase from $200 billion to $300 billion occurred in less than a year, reaching $300 billion on February 29, 2008. However, it took over nine years to rise from $300 billion to $400 billion between 2014 and 2024. The increase of $12.6 billion is also the largest weekly addition since July 14, 2023. In comparison, the overall reserves had grown by $2.8 billion to $692.3 billion in the previous reporting week. Stable oil prices and inflows into India's stocks and bonds have boosted the foreign exchange reserves to $705 billion.

Once government spending in domestic sectors excellerates after the US elections, the stock market buoyancy may return.