India and Taiwan are emerging as strong contenders to replace China's top spot in the MSCI EM Index, with both countries commanding more than 19% weightings each in the index, compared to China's 22.8%. This rise is allowing investors to diversify their portfolios by betting on artificial intelligence chipmakers and the infrastructure boom in India and Taiwan. If current trends continue, either Taiwan or India may catch up with China's standing in the MSCI EM Index this year, marking a shift into a multi-polar emerging markets world [daff9778].
Taiwan's rise in the MSCI EM Index is particularly noteworthy given its market capitalization is less than a third of mainland China's. The Taiex Index has surged 33% this year, driven by gains in Taiwan Semiconductor Manufacturing Co. India's Nifty 50 Index has also seen a strong performance, advancing more than 12% in 2024. Both countries have seen an increase in forward earnings estimates, with Taiwan and India experiencing at least 13% growth each, while China's earnings revision has been slow. Emerging Asia ex-China's equity markets have recorded net inflows of nearly $9 billion since the start of June, with South Korea, India, and Taiwan among the top recipients [438ca8e2].
Foreign investors are increasingly turning to Asia, particularly Japan, China, and India, as attractive investment destinations for equities. A Bloomberg survey of 19 Asia-based strategists and fund managers found that about a third of them favor Chinese stocks, while another third favor Indian equities over Japan in the next six months [f8f57db6]. The anticipated Federal Reserve interest-rate cuts are seen as tailwinds for the two emerging markets. Chinese stocks are preferred for their low valuations and expected policy changes, while Indian shares are favored for their post-election optimism and relative immunity to geopolitical tensions. Indian equities have been on a rally since Prime Minister Narendra Modi's ruling party secured sufficient support to form a coalition government. The nation's stock-market value exceeded $5 trillion for the first time in June. Chinese stocks have been struggling after a strong rally earlier in the year, but analysts and money managers remain upbeat on the market for the next six months as global funds return and corporate earnings improve. Geopolitical tensions stemming from the US election are seen as a key risk for Asia's market. Over half of the respondents believe Asian equities will outperform their US counterparts through the end of 2024, citing Fed rate cuts and cheap valuations [f8f57db6].
Japan, which has experienced 30 years of low growth, is also making a comeback in the equities market and offering great investment opportunities. The rebound in Japan started with Abenomics in 2013 and is still in the early stages of change. The return of inflation in Japan is seen as positive for equities valuations. However, the survey mentioned earlier highlighted China and India as more favorable investment destinations compared to Japan [54b73e74]. India is currently the fifth-largest economy and one of the largest stock markets in the world, with GDP expected to reach $7 trillion by 2030. India offers a unique opportunity for foreign investors and is seen as a favorable hunting ground for both alpha generation and beta in equities. The survey mentioned earlier highlighted India as the best investment among the three Asian giants, with Indian equities attracting $25 billion in net inflows for the year through March [54b73e74] [7d4dfff3].
According to a report by The New Indian Express, India has surpassed China in the number of consistent compounders and delivered more than double the shareholder returns [4a305c27]. The report states that India has 162 compounders compared to 126 in China. Over the long term, India's equity market (Nifty50) has given superior returns compared to any other market in the world. China's Shanghai Composite has had an annual return of 5.9% in the past 20 years. The report also highlights that India is poised to benefit as global businesses look to diversify their supply chains away from China. Key sectors like smartphones, active pharmaceutical ingredients (APIs), and medical devices are expected to drive this growth, potentially contributing an additional $300 billion to India's economy. Additionally, the report mentions that 5,000 companies below the 800 most profitable companies in India are growing at a faster pace [4a305c27].
A recent survey by Bloomberg News found that Chinese and Indian equities are being touted as potential outperformers in Asia in the second half of the year [fe5d56bc]. About a third of the 19 Asia-based strategists and fund managers surveyed expressed a preference for Chinese stocks, citing their attractive valuations and anticipated policy shifts. Similarly, a third of the respondents picked Indian shares as their top bet, highlighting post-election optimism and relative immunity to geopolitical tensions. The anticipated Federal Reserve interest-rate cuts are seen as tailwinds for both markets. Chinese stocks are favored for their low valuations and expected policy changes, while Indian shares are preferred for their post-election optimism and resilience to geopolitical tensions [fe5d56bc].
Chinese stocks, however, are facing challenges. According to Jonathan Garner, chief Asia and emerging markets strategist at Morgan Stanley, Chinese stocks are in a 'secular bear market' and the pain is far from over. The total market capitalization of China's onshore stocks has declined by more than a third to $8.4 trillion. The MSCI China Index has plunged by 55% from its record high in February 2021. Garner attributes the bear market to weak underlying economic growth and corporate earnings growth. The patchy economic recovery, policy uncertainties, and rising geopolitical tensions have affected investor confidence. Despite Beijing's efforts to stem the rout, the market has struggled to sustain uptrends. Garner believes that the consumer sectors, including e-commerce, need to generate better underlying revenue growth for the market to improve. He also notes that profitability is facing structural declines. Japan and India, on the other hand, are seen as attractive destinations for capital, with strong earnings growth and involved domestic investors. Garner predicts that the Topix Index could hit 3,200 by June next year, representing an 11% upside from the current level [bd250b7a].
While the Chinese stock market has faced challenges in recent years due to the implosion of the country's property sector and geopolitical tensions with the US and Taiwan, there are still pockets of value in the market. According to local property industry experts, it is estimated that filling the excess residential property inventory in China will take another three years [e5ad8cd1]. In summary, India and Taiwan are emerging as strong contenders to replace China's top spot in the MSCI EM Index. Both countries now command more than 19% weightings each in the index, compared to China's 22.8%. This rise is allowing investors to diversify their portfolios by betting on artificial intelligence chipmakers and the infrastructure boom. If current trends continue, either Taiwan or India may catch up with China's standing in the MSCI EM Index this year, marking a shift into a multi-polar emerging markets world [daff9778] [438ca8e2] [f8f57db6] [54b73e74] [4a305c27] [fe5d56bc] [bd250b7a] [e5ad8cd1].