Valuations, flows and liquidity are turning more favourable to India relative to China.
China stocks were downgraded at BNP Paribas, which said investors should instead buy more Indian equities because valuations, fund flows and liquidity in the South Asian nation have become more favourable.
Chinese shares were cut to “neutral” from “overweight,” analysts led by Clive McDonnell said in a report today, keeping India “overweight.” The Bombay Stock Exchange Sensitive Index may extend its rally by another 11 percent, BNP said, advising customers to buy State Bank of India and sell Chinese peers including Industrial & Commercial Bank of China.
The Sensex has surged 54 percent this year, with more than half the gains coming after the Congress party's election victory last month. India is the world's third-best performer in 2009 so far, lagging behind only Peru and Russia among the 92 markets tracked by Bloomberg.
“Valuations, flows and liquidity are turning more favourable to India relative to China,” the analysts said, predicting that the Sensex may continue gaining to 16,500. BNP raised its previous forecast of 15,000.
Industrial & Commercial Bank, the world's largest lender by market value, has climbed 21 percent this year in Hong Kong trading. State Bank, India's largest, has rallied 46 percent.
India's economy stabilised in the first quarter, maintaining the 5.8 percent pace of expansion in the preceding three months. Growth in China's gross domestic product slowed to 6.1 percent from 6.8 percent in the same period, owing to the dependence on overseas sales.
Stephen Roach
Stephen Roach, chairman of Morgan Stanley's Asia operations, said yesterday he's more optimistic about prospects for India than China for the first time.
Investor Jim Rogers is more skeptical on the government's ability to introduce new policies, saying on May 21 that he continues to prefer China to India for investments.
Indian stocks are valued at about 2.8 times book value, more than the 2 times in China, McDonnell wrote. Still, return on equity in India is 22 percent, the second-highest in Asia after Indonesia, while China is 17 percent, he added.
Following the elections, international investors have allocated more funds to India, with the market accounting for 31 percent of total weekly flows among six Asian nations, BNP Paribas said.
China's inflows last week dropped to $18 million from an average of almost $1 billion a week in the first quarter, the brokerage added, citing data from EPFR Global.
Profit growth
Profit growth in India is also expected to outpace that in China, with earnings per share for the current fiscal year forecast to increase by 8 percent and rebound to 16 percent the following year, BNP Paribas said.
China's earnings per share declined 7 percent last year and will probably remain “flat” this year, the report added. The brokerage has a target of 12,500 for the Hang Seng China Enterprises Index, representing a 15 percent increase from yesterday's close.
“Other markets will outstrip this gain due to much greater sensitivity of earnings to economic recovery,” the analysts said.
The author is a Bloomberg News columnists The opinion expressed is his own
