The strong rebound in the Chinese stock market over the past few days may not have a material impact on the Indian market, Kotak Institutional Equities said, as the brokerage believes the foreign portfolio investor (FPI) flow rebalancing across the two markets will likely be small and domestic bullish sentiment will hardly change with China’s revival.
“The impact on earnings will depend on the magnitude of recovery in the Chinese economy but seems fairly modest,” it said.
On Monday, China’s Shanghai Composite index was trading 7.2 per cent higher at 3,309.80. The index has climbed 18 per cent in the past one month. In contrast, the BSE Sensex fell 0.9 per cent to 84,821.18 today and is up 2.24 per cent in the past one month.
Kotak said FPI flows to India — both active and passive — may see some moderation, depending on the extent of the ongoing rally in the Chinese market. It said FPI inflows have been strong but seem to be largely of the passive variety.
“Active FPIs may look to deploy incremental GEM inflows into China. The Chinese markets are undoubtedly very cheap and the rally could sustain for a while. However, we doubt active FPIs will sell a meaningful portion of their stock in India and move the same to China. Passive
or ETF incremental inflows from GEM ETF funds may see some moderation,” Kotak said.
The domestic brokerage said that any change in the relative weights of the two countries in various benchmark indices would only affect incremental flows from GEM ETF funds. Domestic inflows and non-institutional sentiment are unlikely to be affected by the rally in the Chinese market.
“One significant factor that is influencing foreign portfolios is the outperformance of the Chinese stocks which is reflected in the massive surge in the Hang Seng index by around 18 per cent in September. This surge has been triggered by hopes of revival in the Chinese economy in response to the monetary and fiscal stimulus announced by the Chinese authorities. The cheap valuations of Chinese stocks are keeping the momentum intact. This can prove to be a tactical trade which can sustain for some more time,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Kotak felt India’s domestic non-institutional investors will likely continue with their price-insensitive bidding approach, as long as they have strong conviction about high returns from the market or as long as trailing returns look good.
“Institutional investors (MFs) have no option but to deploy the funds coming into domestic mutual funds, irrespective of valuation and/or conviction levels. Valuations are largely redundant in such a market,” Kotak said.
Kotak said it does not see any material impact on the Indian economy from a recovery in the Chinse economy. India’s exports to China are unlikely to see any major jump, while imports will continue as before, Kotak said.
“Any increase in Chinese oil demand may be offset by fresh supplies from both OPEC+ and non-OPEC countries. Saudi Arabia seems to be keen to increase production. A few metals companies may see earnings upgrades but that would depend on the duration and magnitude of the recovery in the Chinese economy. As of now, Chinese economic conditions are fairly weak,” it said.
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