China's positive GDP growth rate may take a bite out of India's FPI flows

The difference in growth rates could have implications for foreign investment and skew emerging market (EM) portfolio flows towards China, thus impacting India
The IMF has projected a positive GDP growth rate for China in CY20, while estimating a 4.5 per cent contraction for India this financial year.

China’s economy grew 3.2 per cent in the second quarter, following a slump of 6.8 per cent in the first, according to its National Bureau of Statistics. This was driven by its success in controlling the outbreak and policy support from the government. Various agencies have pegged India’s FY21 growth between 1.3 per cent and -9.5 per cent.

The difference in growth rates could have implications for foreign investment and skew emerging market (EM) portfolio flows towards China, thus impacting India, said experts.

“Though market participants were bearish on China, it has contained the pandemic well and restarted economic activity. If it can deliver growth in the next couple of quarters, much of the EM allocation could move there, which could impact flows to India,” said Siddhartha Rastogi, COO and head (sales), Ambit Asset Management. Markets globally have experienced a risk-on rally, buoyed by the progress on Covid-19 treatments and fast-tracking of the vaccine development.

Year-to-date, however, FPIs have pulled out Rs 11,000 crore from India, even as they have been net buyers since May.

 

"Earnings growth drives share prices in the medium-to-long term, and the Nifty has been delivering mid-single digit earnings growth for the past five years. This is worrying," said Rastogi.

 
Yet, not everyone believes India will lose overseas flows to China, based on GDP numbers alone.

First, India’s unlisted universe is a significant contributor to GDP numbers. The impact of negative GDP growth on flows into listed stocks (which have good fundamentals) may not be that severe. Second, escalating tensions with the US and other countries could hit trade, and hence, flows into China.

“If listed stocks do well in anticipation of a smart recovery, India will continue attracting overseas investment despite the GDP blip. Investors are more interested in the delta of potential growth; not so much on absolute valuations during an economic downturn,” said U R Bhat, director at Dalton Capital Advisors (India). FPI flows are determined by macro-economic numbers, sovereign ratings, political stability, currency, taxation, corporate earnings, as well as the potential for returns. “If economic nationalism takes centre stage and countries move away from Chinese imports, flows into China could take a hit,” says Bhat.

Over the long term, India seems well-placed with corporate earnings projected to grow an average 11.5 per cent annually over the next decade. Financials (14.5 per cent) and infrastructure (16.7 per cent) are likely to lead the pack, says UBS. 

“The challenge with investing in India isn’t scarcity of opportunities. On the contrary, we see an abundance. It’s the obstacles hindering foreign investors from tapping local markets. Progress has been made and we expect further reforms, though more needs to be done,” says the recent note by the brokerage.


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