Why Wall Street is turning its attention from China to India

The recent rise in investor interest in the Indian stock market, which surpassed Hong Kong and became the world's fourth-largest in January of this year, represents a notable shift in global finance trends.

Before it reached this milestone and confirmed sustained growth, the global perception of the Indian economy was elevated by another significant development over the past two years: the Chinese market is not appealing anymore.

Experts project that China could require five to ten years to address its debt crisis, which has been exacerbated by the pandemic.

Wall Street investors have noticed Beijing’s weak spot and are scouting for alternative opportunities, and India has appeared as an appealing option.

Despite being a newly-growing market with inherent risks, Western investors are now favouring India over China, previously hailed as the world's largest growth story and a top destination for global investors.

In the US exchange-traded fund (ETF) market, the main fund for Indian stocks experienced a surge in investments in the final quarter of 2023, while the four largest China funds saw substantial outflows, totaling almost $800 million.

Active bond funds have also been adjusting their investments since 2022. For every dollar they previously invested in China, they are now putting 50 cents into India instead, EPFR data says.

Triumph over enemies’ adversity

India's rapid economic growth is fueled by the consistent expansion of its stock market over the last few decades. In the past twenty years, both the gross domestic product and market capitalisation in the country have surged from $500 billion to $3.5 trillion.

Some Indian officials attribute this growth to the steady economic expansion, stable currency, and fiscal discipline.

However, what enabled India to overtake Hong Kong was also Russia's economic decline.

The imposition of price caps on Russian oil by the EU and US, led by its war on Ukraine, has altered its position among emerging global economies.

India became a much better choice as Russia and China faltered.

Morgan Stanley, a prominent investment bank and financial services firm in the US, predicts that by 2027, India will become the world's third-largest economy, and by 2030, it will have the third-largest stock market.

The investment giant attributes these forecasts to "global trends and key investments the country has made in technology and energy," naming this decade as "India's decade."

While the Modi government focuses on increasing infrastructure spending, as announced by Finance Minister Nirmala Sitharaman last week, the results of presidential elections could potentially change the trajectory of India’s economic rise.

Election results

On one hand, Prime Minister Narendra Modi draws significant political support from the northern states, which are populous but economically disadvantaged.

On the other hand, the southern states, known for their higher prosperity and longer life expectancy, are crucial to his ambition of becoming the world's third-largest economy, as this is where factories are starting to cater to giant companies like Apple and Amazon.com.

Modi’s "Make in India" initiative aimed to raise domestic manufacturing, calling on global manufacturers seeking alternatives to China. As a result, many have opted to set up operations in the southern states.

This surge in industrial activity has transformed Mumbai into a commercial hub. Overall, government data reveals that the five southern states collectively contribute over a third of India's GDP and accommodate roughly one-third of the country's 250,000 factories.

The southern region has historically opposed the Hindu nationalist agenda of moulding India into a global power unified by a single religion and language, a narrative from which Modi has derived much of his popularity.

Instead, some locals argue that the region's diversity, combined with a dedication to education and industrial growth, has been instrumental in driving the economic prosperity of the south.

This could lead to Modi losing support in the south. While he may not rely on southern votes to secure election victories, he depends on their contribution to fully benefit from the growing investor interest in India.

In the 2019 national election, Modi’s Bharatiya Janata Party (BJP) failed to secure any seats in three of the five southern states.

Although the prime minister is expected to win the elections set to be announced on June 4, uncertainties can still concern investors.

Due to its domestic economic challenges, including rising inflation, low per capita income, and agricultural sector crises, India remains a challenging environment for foreign companies to navigate, increasing the risk associated with direct investment.

But one thing seems enough to make it an attractive option for foreign investments: its stocks outperforming those of China.