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China Stock Turmoil 2015
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India's Sensitive Index has fallen 11 per cent from this year's peak on January 29, the world's worst performer after Egypt.Photo: AP

China market turmoil proves a blessing for India

Foreign investors are shifting to Indian stocks as they are less exposed to slowing growth in the mainland than their emerging-market peers

The tumult in China's stock markets has turned into a blessing for Indian shareholders.

International investors are pulling out of China, fuelling record outflows through the Shanghai-Hong Kong exchange link, amid a US$3.9 trillion plunge in mainland equity values since June 12. They have ploughed US$705 million into India over the same period, sparking a world-beating 7 per cent gain in the benchmark S&P BSE Sensex index.

China's interventionist response to the rout - including unprecedented trading restrictions - has prompted foreigners to shift their equity exposure to India, according to hedge fund Alexander Alternative Capital. The US$2 trillion economy, which got a fresh boost from tumbling crude prices this month, is less exposed than its emerging market peers to slowing growth in China, Aquarius Investment Advisors says.

"The recent travails in China make India seem like an oasis of calm in terms of volatility," Jonathan Schiessl, the head of equities at Ashburton Investments, which oversees US$12 billion, said in an e-mail. The fund has cut its exposure to China by 1 per cent in the past month to invest in Indian equities and raise its cash position, he said.

Gains in Indian shares over the past six weeks mark a turnaround from the preceding four months, when China's bull market and doubts over Prime Minister Narendra Modi's economic policies kept foreigners away. The Sensex tumbled 11 per cent from this year's peak on January 29 to June 12, making it the world's worst performer after Egypt.

Those concerns have been allayed by the biggest jump in indirect tax receipts in May since 2011, which gives Modi ammunition to boost expenditure. A 12 per cent decline in Brent crude prices this month has also pared government subsidy bills in a country that imports about three-quarters of its oil.

India's economy expanded 7.5 per cent in the March quarter, beating China's 7 per cent growth, while the International Monetary Fund predicts India will outpace its neighbour in the current fiscal year.

The longer-term growth outlook is also stronger in India because of its superior demographics, according to Franklin Templeton Investments.

More than 62 per cent of the nation's 1.2 billion people are between age 15 and 59, government data shows. China's pool of workers in this age group is expected to shrink by 61 million by 2030, according to the United Nations. That is about the equivalent of losing the combined working populations of Britain and France.

"India is in a phase in which multiple engines of growth can drive [gross domestic product] from 7 to 8 per cent to 9 to 10 per cent in the next five years," said Sukumar Rajah, who manages about US$9 billion as chief investment officer of Asian Equity at Franklin Templeton in Singapore. "For China, we expect growth to decelerate over the next few years partly because it doesn't benefit from demographic trends the way that India does."

For overseas money managers, China's meddling has raised concern about the government's promise to enact the free-market reforms needed to make mainland shares eligible for MSCI's benchmark indices.

Measures to end the rout include a ban on selling by major shareholders, halting initial public offerings and allowing more than 1,400 companies to suspend trading.

"The intervention puts a wet blanket on China's indices being included in the MSCI gauges," said Michael Corcelli, chief investment officer of Alexander Alternative in Miami.

India's stocks rally may unravel if the strengthening El Nino weather pattern weakens monsoon rains, said Anil Ahuja, the Singapore-based chief executive of hedge fund IPEplus Advisors.

The June-September rainfall, which was 16 per cent above a 50-year average at the end of last month, is now 7 per cent below normal, according to the weather office. The monsoon waters more than half of India's farmland and a shortfall can stoke food prices.

"A weak monsoon has not been priced in," Ahuja said.

"India's recent outperformance could be because it has a steady macroeconomic picture and is relatively insulated from any slowdown in China compared with other emerging markets such as South Korea and Brazil," said A.S. Thiyaga Rajan, a Singapore-based senior managing director at Aquarius.

"India could see greater interest, now that it is projected to be the fastest-growing major economy."

This article appeared in the South China Morning Post print edition as: China turmoil proves a blessing for India
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