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India and China — a 2023 tale of two markets

Compared with a year-and-a-half ago, when its economy had just begun to reopen after a devastating surge of the delta variant, India’s stock market is unchanged in dollar terms. And yet, its weight in the MSCI Emerging Markets Index has zoomed past Taiwan and South Korea to second place, with almost the entire gain coming at the expense of the gauge’s biggest constituent: China.

The world’s second-largest economy has seen equities slump by two-fifths since June 2021, thanks to Beijing’s isolationist Covid-19 policies, turmoil in the real-estate industry and a punishing antitrust campaign against the country’s valuable tech firms. If China has been mired in a surfeit of pessimism, the opposite is true of India. Thanks to pent-up urban demand after the pandemic, stocks have held up reasonably well despite the US Federal Reserve’s aggressive monetary tightening.

As a result, while China’s share of MSCI EM has slid to 28%, from 35% in May 2021, India’s has risen to 15%, from 10%.

Will the current reopening of the Chinese economy put an end to India’s outperformance? That will be a question for global investors in 2023.

If other countries’ experiences are any guide, the pivot away from zero infections toward letting the virus rip through communities will be chaotic, and possibly deadly for China’s elderly of whom only 40% have booster shots. However, a decisive transition may help pull consumer and business sentiment away from near-record lows, shake the property market out of its slumber and accelerate auto sales. That may also prompt analysts to bump up their forecast of 4% earnings growth over the next 12 months. Before the pandemic, those expectations were at 17%.

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