India and China, Both Suffering Selloffs, Have Very Different Prospects

There’s been a major selloff in Chinese stocks today. Indian equities have also slipped slightly, in a turbulent reception for the government budget, after a selloff last week. But there are very different reasons behind the moves, and very different prospects for stocks in the Asian supernations.

Long-term, India and Japan have been Asia’s most-exciting markets, although Taiwan’s stock market has been the clear outperformer in Asia to date this year, based almost entirely on chip gains, as I’ve explained. China bulls, meanwhile, are waiting for signs of recovery … and waiting … and waiting.

It looks like that wait will go on. The CSI 300 index of the largest listings in Shanghai and Shenzhen dropped 2.1% today, their worst decline in six months, while the Nasdaq-like ChiNext Index fell 3.0%. That follows a 0.7% dip for Shanghai and Shenzhen on Monday.

Investors are disappointed by a lack of support from the Chinese Communist Party, which last week concluded a major meeting. The party on Sunday issued a list of 300 steps that it plans to take as a result of the Third Plenum, a once-in-five-years conflab designed to shape policy for the next half-decade.

But rather than offering solutions to China’s economic problems, particularly the downward spiral in the property industry, the communiqué issued after the meeting downgrades the importance of the private sector. The 2013 third plenum, the first under then-new Chinese President Xi Jinping, cited the importance of granting the market a “decisive role” in terms of attention and resource allocation. Now, however, after more than a decade with Xi in charge, the new document states only that it is necessary to “better leverage” the role of the market as part of a thrust to “foster a fairer and more dynamic market environment, and make resource allocation as efficient and productive as possible.”

Those choices of wording are important. They signal the markets and the private sector have slipped in terms of priority. Xi normally imagines the government and Communist Party as the first and central pillar, the second pillar being the wide array of state-owned enterprises. But private industry, which accounts for by far the largest amount of jobs and profits, is third and least-important, under a now-lopsided platform.

It’s a far cry from doing anything to bolster consumer or investor confidence. Indeed, Xi is now “China’s chief economist,” notes Stephen Roach, formerly chairman of Morgan Stanley Asia as well as Morgan’s global chief economist. It is a worrying sign. His training is in politics, not economics. What’s more, Xi has eliminated any room for discussion, has stressed the centrality and importance of his own views, and appears to mistrust successful businesses and entrepreneurs. He views them as a threat to the party and his centrality. National security is given equal weighting to the economy, despite few obvious direct threats that aren’t of its own making.

“It’s all about Xi,” Roach says in a social-media post. “The ultimate in leader-centric Chinese governance: the end of internal debate over economic policy. Third Plenum an echo chamber rather than a script for reform.”

The lack of stimulatory policies coming out of last week’s meeting has shaken investors. The Chinese Communist Party could in the past always point to outsize growth as justifying its continued rule. But under Xi, there’s been an attack on the profitability of multiple industries, an insistence that private industry devote itself to noncore philanthropic efforts for the social good, the hint of the need for wealth redistribution in a bid for “common prosperity,” the sudden scrapping of what would have been the world’s largest-ever stock offering for Ant Financial, the overnight abolishment of industries like for-profit tuition, and the embarrassing listing-banning-delisting of ride-hailing market leader Didi Global.

So there’s good reason to believe Chinese stocks will continue to struggle. That’s not the case in India, where the government’s actions have also caused a selloff. But the administration of reelected Prime Minister Narendra Modi has a highly supportive set of policies regarding markets, and the economy.

Today’s choppy Indian stocks saw the Nifty 50 close with a slim 0.1% loss, similar for the Sensex. Both indexes dipped sharply midday, with the Nifty off 1.5%, only to recover much of their lost ground.

In the budget, the Modi government is opting to raise the tax on capital gains from stock investments, as well as the tax rate on equity-derivatives trades.

The tax on stocks held for less than one year will rise from 15% to 20%, effective immediately, while on stocks held for longer than one year the rate rises from 10% to 12.5%.

For futures, the transaction tax rises from 0.0125% to 0.02%. For options, the tax goes from 0.0625% to 0.1% on all transactions. In other words, the trading tax almost doubled on both options and futures. That change will take effect from October.

It was these higher tax freights that sent stocks south during the budget speech from well-respected Finance Minister Nirmala Sitharaman. While frequent traders will be worse off, mutual-fund managers say the move may encourage longer-term investing. I’d agree that less speculation and more investing is a good thing.

Retail investors currently account for 41% of derivatives trading, Reuters reports, up from just 2% in 2018. Regulators and the government would like to dissuade the most-speculative forms of derivatives trades. The finance ministry published its annual Economic Survey on Monday stating that the rapid rise in derivatives trading caters to a “gambling instinct,” with the potential for outsized gains – and of course, losses.

Since a pandemic-produced dip in April 2020, Indian stocks have been on a rip. The Nifty 50 is up 202.8% since then, a tripling. The Sensex almost matches that with a 191.5% rise over the same timeframe.

They have been highly consistent long-term performers. I imagine that, after this short-term budget shock, they will resume their rise. International investors should stick to exchange-traded funds when looking to gain Indian exposure, which should help mitigate the trading taxes.

The current administration is dubbed “Modi 3.0,” although Modi’s party only narrowly scraped a win. It has been forced to find coalition partners rather than ruling on its own, as I explained in greater detail in the wake of the results. Stocks had rallied after exit polls erroneously indicated a likely Modi landslide.

The Modi administration has also voiced criticism of the private sector, with the Economic Survey indicating private business is not pulling its weight in terms of investment and jobs. Capital expenditure is lagging, hiring lackluster and pay increases meager despite rising corporate profits.

But whereas the Xi perspective in China is all about containing the influence of the private sector, in India the policy initiatives are designed to spur growth. There’s a multipronged approach, Nomura notes, to boosting private-sector investment, deregulation, the construction of infrastructure, and balancing exports with the “Made in India” drive for domestic production.

The Modi budget allocates the equivalent of $24 billion to boosting jobs and improving education nationwide. The finance minister called for a focus on the private sector – jobs, improved skills, small businesses and the middle class – in a clarion call that is the polar opposite of the Marxist agenda pushed in China by Xi.

What’s more, India has just scrapped an unpopular “angel tax” on startups. First put in place in 2012, the current tax stood at 30.9% on the excess amount, if an unlisted company sold shares at a price above fair market value. The budget abolishes that.

India looks set to have the highest rate of growth among Asian economies, with the consensus call among economists for a 7.1% pace this year easing only slightly to 6.8% in 2025. China, once in the position that India is now in, is pushing hard to achieve growth of 5.0% for 2024, a pace predicted to fall to 4.4% next year.

India is in a macroeconomic “sweet spot,” as Nomura puts it. The Indian stock rally is even healthier than the U.S. market runup, argues Jefferies Global Head of Equity Strategy Chris Wood in his latest Greed & Fear weekly report.

As Wood puts it, “the narrowness of the U.S. stock market rally in recent months cannot be viewed as healthy,” with Nvidia NVDA alone accounting for one-quarter of the S&P 500 gains, even if it is underpinned by the direction and magnitude of earnings trends. “The India stock market action has been fundamentally much healthier than America’s over the past year and more, in terms of a rally which has been broad-based and where stock gains have been led by small- and medium-cap companies, which have also enjoyed the best earnings growth.”

I’ll leave it to you to decide whether Indian stocks really are healthier than the Wall Street gains. But there’s a great argument for diversification into Indian stocks as a way to tap the top-performing Asian economy. Leave Chinese stocks alone for now, with a muddled policy agenda that does not favor private industry, and does nothing to reinforce business and consumer sentiment.