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China and India boom, but stock markets diverge

China and India are the world's hottest major economies, but their stock markets have been moving in opposite directions.

india Updated: Feb 02, 2006 18:57 IST

China and India are the world's hottest major economies, but their stock markets have been moving in opposite directions.

After four straight years of gains, India has become the most expensive market in Asia excluding Japan, while China's locally traded stocks are finally starting to look attractive after falling for four of the last five years.

"I think India's stock market has perhaps already reflected more than what the fundamentals suggest in the immediate term. So a short, sharp correction is very much on the cards," said Bratin Sanyal, head of Asian equity investments at ING Investment Management in Hong Kong.

But in the medium- to longer-term, fund managers say it is prudent to be exposed to both markets as long as their bullish economic growth outlooks remain intact.

Unlike India, China had been plagued by uncertainty surrounding Beijing's stock market reforms, which have raised fears the market will be flooded with new issues as the government unloads US$250 billion worth of state shares.

But with the reform well underway and China looking to open its so-called A-share market further to foreign investors, investor confidence is starting to return.

The index of Chinese stocks traded in Hong Kong, which is more easily accessible to international investors and includes many of China's top firms, has posted double-digit gains so far this year, reaching its highest level in more than eight years.

But China A-shares are still 77 per cent off their peak hit in June 2001.

"Given that the (A share) market has underperformed so much and there has been such a hugh discrepancy between the state of the economy and the stock market...I think the stock market will catch up with the reality and the economy," Bratin added.

China's economy is forecast to grow by a blistering 9.2 per cent in 2006, while India is seen expanding at 7.6 per cent for the 2005/06 fiscal year, Reuters polls showed, strongly beating the United Nations world growth forecast of just over 3 per cent.

India's stock market trades at some 16 times 2006 earnings, which some market watchers say is justified by strong earnings growth, but is still well above 11 times for MSCI China and 11.5 times for Asia ex-Japan, according to Bratin.

"We're not really seeing existing players increase their exposure to India dramatically, as valuations are stretched and are not as attractive as before," said Abhay Aima, head of equities, HDFC Bank.

BNP Paribas Peregrine's head of Asian strategy, Raymond Foo, said signs that money supply is peaking in India coupled with neutral earnings momentum mean the Chinese market, where both factors are picking up, is far more attractive.

Foo thinks China is in the early stages of reflation while India is nearing the end of its cycle.

He also sees a need for interest rate increases in India given it has one of the highest inflation rates in Asia. China's interest rates, on the other hand, are expected to remain low with speculation on the appreciation of its yuan currency resulting in capital inflows.

Some of the stocks Foo favours consumer-oriented China Life Insurance Co., China Construction Bank, milk producer China Mengniu Dairy Co Ltd, top cotton textile producer Weiqiao Textile Co Ltd and China Travel.


So far this year, China's domestic A-share index has risen 8 percent to Jan 25, before the market closed for the week long Lunar New Year holidays. Trading will resume on Feb 6.

The H-share index of Chinese stocks listed in Hong Kong such as PetroChina and China Life has rallied nearly 21 per cent this year to Feb 1.

This compares to a 4.91 per cent rise in India's key BSE index, a 2.29 per cent increase in Japan's Nikkei 225 and a 5.82 per cent rise in Hong Kong's Hang Seng Index.

Andrew Holland, vice president of research, DSP Merrill Lynch, said he didn't see appetite for India waning, but added that foreign funds may be reducing their weighting simply because they didn't know what else to buy.

"The market looks expensive in the short-term, and some stocks have reached their FII (foreign institutional investor) limit, while in state-run companies (like ONGC) too, unless the government goes in for more divestment, there's not much to buy."

Foreign funds moved a record $10.7 billion net into Indian equities last year, helping the benchmark BSE index gain 42 per cent in 2005.

Some of the best performing stocks in the index this year include top car maker Maruti Udyog Ltd, leading mortgage firm Housing Development Finance Corp, and power equipment maker Bharat Heavy Electricals Ltd.

Anup Maheshwari, chief investment office at HSBC Mutual Fund, which manages about Rs 70 billion worth of assets, said in December that he favoured laggard state-run banks, expecting the sector to outperform the wider market in 2006.

His equity fund holds shares in Punjab National Bank and Bank of India.

First Published: Feb 02, 2006 18:57 IST