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The ‘sell India buy China’ narrative has been gaining momentum lately and as the Indian markets continue to be in pause mode after the sharp correction earlier this month, the question is does China offer better value now? The MSCI China has outperformed MSCI India Index in the past couple of months. But Nomura says they do not expect it to be “long-lasting” though there is “scope of near-term outperformance of China over India.” The brokerage firm has retained its Overweight stance on India in its Asia-ex Japan portfolio while maintaining Neutral rating on China.
Nomura sees near-term risks in India
Explaining their India stance, Nomura stated that, “On India, we retain a structural overweight call, but believe that there remains a risk of further multiple compression due to the positive China narrative, and local factors. We think peak dollar could catalyze renewed interest in ASEAN-4 markets.”
They outlined, the key near-term risk in Indian markets include, “further multiple compression and some earnings downgrade risk.” Valuations is one of the key concerns. It is still elevated according to them at “at 21x for MSCI India Vs average valuation of 19.6x/21.5x between 2015/2022.” the report stated.
They believe though the valuation recalibration has been playing out and the markets are at significantly lower levels compared to 24x in last October, the “the optimism on China post-DeepSeek, and investors having an alternative in China, we see scope for further multiple compression in the near-term.”
According to them, “the positive narrative on India is also being tested amid a slowing economy and earnings downgrades, tight banking sector liquidity, some tariff risks from the US (Vs a consensus view that India might be almost unharmed); and a weakening and underperforming rupee.”
The big FII selling continues
This is further exacerbated by persistent and heavy “net-selling from foreign investors,” Nomura added. Across the secondary market, they pointed out that “India-dedicated offshore equity funds and offshore-listed ETFs are creating a vicious spiral.” While foreign ownership, in percentage terms, is now at a decade low of 16% (end-Jan 2025), foreign investors still own $782 billion of Indian stocks (end-Jan 2025), “which still appears elevated compared to pre-pandemic levels, suggesting scope for more net-selling ahead so long as the positive China narrative stays in place,” Nomura highlighted.
While domestic equity flows have so far been very resilient, they think “investors also seem to be concerned that those might be the next shoe to drop, completing what might be the full capitulation and the time for foreign investors to buy.”
Nomura says current slowdown in India cyclical
The report goes on to elaborate why Nomura considers the current slowdown cyclical. This is because there are signs “that policies have pivoted to support growth (i.e. RBI’s liquidity injections, rate cut, modest boost to consumption in the Budget and easing of macro-prudential measures )”. However, they do take cognizance of the fact that “these measures would take some time to flow through the economy.”
India remains a large and liquid market with generally higher-quality companies, and “we think India will continue to benefit from longer-term themes such as supply-chain relocation/trade-diversion, and high earnings and nominal GDP growth rates,” they added.
They pointed out that there are indications that “Broader markets (NSE500) also appear technically oversold, with the percentage of stocks above 200DMA in NSE500 and the Nifty Index close to record lows.”
“Another silver lining is that EM equity investors are already Underweight India, with a larger Underweight on India equities compared to HK/China equities, based on our survey of large EM funds,” they added.
DeepSeek makes a difference
China in comparison may have a lot of excitement in the short-term. Nomura believes that “MSCI China stocks may temporarily overshoot our end-2025 target, potentially reaching our bull-case multiple of 13x, driven by positive momentum, underweight positioning, attractive valuations, and accelerating Southbound flows,” in the near-term.
According to Nomura the performance of the MSCI Asia-ex Japan (AeJ) stocks would have been “lackluster if not for the emergence of DeepSeek, which has catapulted HK/China stocks higher.” The renewed investor interest in “China’s technological innovations such as DeepSeek/AI/robotics/EVs suggests that Chinese equities no longer warrant a deep discount.” However, in terms of allocation, they are maintaining a “Neutral stance on MSCI China and recommend that investors remain overweight on select large-cap internet/AI/tech-related names there.”
Nomura: The big risk now
Nomura highlighted that the risks to their multi-quarter positive view on India is a “prolonged period of underperformance:
1) If China equities become more self-sustaining, aided by a large fiscal stimulus and a significant de-escalation in US-China tensions
2)If India’s cyclical slowdown morphs into a longer-lasting slowdown reverting to pre-pandemic periods of sub-par growth.
The main “upside risk to our near-term cautious stance is US-China tensions escalate,” they added.
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