Is India Set to Surpass China as the Preferred Destination for Global Investors?

China's Economic

With China grappling with economic challenges and the Shanghai Composite ($CHSC) hitting a 5-year low, a notable shift in global investment trends is underway as investors redirect their capital from China to India. India’s stock indices are soaring to unprecedented heights, marking their eighth consecutive year of gains in 2023, fueled by optimism surrounding the country’s robust economic growth prospects and emerging as an alternative to China’s faltering market.

Leading financial institutions such as Goldman Sachs and Morgan Stanley have thrown their weight behind India as the premier investment hub for the next decade. According to Goldman Sachs, global investors poured a net total of $21 billion into Indian stocks in 2023. India, recognized as the world’s fastest-growing major economy, has witnessed substantial infrastructural development under Prime Minister Modi’s leadership, aiming to attract global capital and supply chains away from China. M&G Investments highlighted India’s genuine long-term growth narrative and its distinction from China as factors driving investor interest.

Historical data underscores the close correlation between India’s economic expansion and the performance of its stock market. With India’s economy projected to sustain a growth rate of 7%, a commensurate expansion in market size can be anticipated. Over the past two decades, India’s gross domestic product and market capitalization have surged in tandem, rising from $500 billion to $3.5 trillion. In January, India briefly surpassed Hong Kong to claim the title of the world’s fourth-largest equity market, with Morgan Stanley forecasting India’s stock market to ascend to the third-largest globally by 2030. India’s prominence in MSCI Inc.’s developing-market equities benchmark has surged to an all-time high of 18%, contrasting with China’s dwindling share, which now stands at its lowest on record at 24.8%.

Capital flows underscore the divergence from China to India. Notably, the primary U.S. exchange-traded fund investing in Indian stocks witnessed record inflows in Q4 of 2023, while the four largest China-focused funds collectively experienced outflows nearing $800 million. EPFR data reveals that active bond funds have allocated 50 cents to India for every dollar withdrawn from China since 2022. Despite concerns regarding India’s equity market being overvalued and among the world’s most expensive, with the S&P BSE Sensex Index ($SENS) nearly tripling from its March 2020 low while earnings have only doubled, some analysts argue that India’s low per capita income sets the stage for sustained expansion and novel market opportunities. BNY Mellon Investment Management contends that despite volatility, betting on India’s economy reaching $8 trillion or more by the next decade warrants the associated risks.

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