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Investment firms turn bullish on Chinese stocks, downgrade Indian equities

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Investment firms suggest that Chinese equities back on track

Investment companies are becoming more bullish on Chinese stocks while they are backing off Indian equities. Goldman Sachs, BlackRock, UBS, and Nomura have all expressed a positive outlook for Chinese equities while recommending that investors reduce their exposure to Indian stocks.

Government policy easing will spur recovery for Chinese stocks

Goldman Sachs Group expects positive returns for Chinese stocks in the next 12 months, despite the recent regulatory pressures on tech firms and this year’s property debt crisis. The investment bank attributed its decision to a softer approach by the Chinese government that is expected to ease the economic pressure and result in better valuations.

Goldman forecasts onshore and offshore stock returns to reach 16% and 13%, respectively, over the next 12 months. In its report, the company also decided to upgrade offshore stocks from market-weight in July to overweight. The report stated that Goldman strategists believe a modest policy easing will spark the re-rating of Chinese stocks to reduce domestic macroeconomic pressure and ensure stability ahead of the 20th Party Congress.

Similarly, BlackRock believes that the Chinese government’s regulatory scrutiny of private companies is mellowing down, and Chinese stocks are expected to recover. The investment management firm has revised its Asia-focused portfolios to upgrade from underweight to more neutral positions on Chinese stocks. It only maintained its underweight grade for internet services companies.

From a valuation standpoint, UBS thinks that Chinese equities are looking very attractive, particularly in certain sectors where some firms are trading below book value or at only two- or three-times earnings. It decided to double upgrade the rating for Chinese equities to overweight.

Bin Shi, Head of China Equities at UBS, says the Chinese government is likely to adjust its policy if economic growth and people’s livelihood are affected.

India equities receive downgrades

Nomura has decided to downgrade domestic Indian equities from overweight to neutral due to unfavourable risk-reward. The Japanese financial holding company recommends that investors redirect their investments to China and other ASEAN countries that have underperformed compared to India this year.

In a note released in late October, Nomura explained that India’s valuation appears “very stretched” and emphasized that 77% of domestic stocks in the MSCI index are trading higher than pre-pandemic or post 2018 average valuations. Equity strategists Chetan Seth and Amit Phillips pointed out that most positives are already well known and appear to be priced in, including the surge in vaccination rollouts, demand recovery, and reopening of the country’s economy.

Besides Nomura, UBS had a similar stance on Indian stock valuations. On a note, the financial services company described Indian stocks as unattractive and gave them an underweight rating. According to UBS, Indian markets are expensive valuation-wise, and their earnings momentum is slowing down. The brokerage also mentioned that India has less scope for an economic recovery this year despite its domestic stocks outperforming markets such as Indonesia.

Meanwhile, Goldman Sachs only downgraded Indian equities to market weight, attributing its decision to the country’s dramatic run this year that propelled it to become the best performing emerging market in Asia. In its Asia-Pacific portfolio strategy report on November 11, Goldman Sachs stated that it expects the Indian markets to consolidate within three to six months and underperform the broader Asian region.

In 2021, Indian stocks went up by almost 28%, and the investment bank said this surge was caused by the country’s loose monetary policy, increase in vaccination rates, and economic reopening.

Furthermore, BlackRock’s head of active investments for the Asia Pacific, Belinda Boa mentioned at a briefing that they are beginning to take profits from Indian markets due to the aforementioned high valuation this year.

However, the New York-based asset manager remains positive in India in the long term due to various factors, including structural reforms, a strong pipeline of initial public offerings (IPOs), and economic growth. Boa added that they expect a continued increase in IPO listings in India and opportunities in its tech and new economy sectors.