This year Bombay Stock Exchange’s Sensex is up almost 3% through the end of Wednesday, while China’s benchmark Shanghai Composite Index is down 25%, putting India ahead by a whopping 28 percentage points.
So, why this stark differentiation between the stock markets of the world’s two largest emerging countries?
Even as the developed world fears another recession, both the Indian and Chinese economies have been growing very rapidly in recent months. Local companies have been reporting double-digit profit growth. China’s gross domestic product was up 11.9% in the first quarter of this year while the Indian economy grew by 8.6%. However, Chinese growth has slowed in the second quarter of the year to 10.3%.
Investors fear that there could be a further slowdown over the rest of this year. Meanwhile, India has not thrown any major surprises so far in 2010 – making it a haven for investments.
China’s stock market slide started around three months ago, partly due to the Chinese government’s measures to roll back the stimulus it had pumped into the economy during the 2009 downturn.
The government has tried to reduce speculative activity in its red-hot property market by, for example, increasing the minimum payment required to buy properties.“The market was taken by surprise as the tightening came earlier than expected,” according to a note from analysts at HSBC Global Asset Management.
Also China last month loosened its foreign exchange mechanism, which had been keeping the yuan artificially low, thus helping Chinese exporters. Now analysts are divided over whether the new currency flexibility will help or hurt the Chinese economy.“
In addition, we have the European sovereign debt concern, which intensified in May amid concerns of contagion,” note the HSBC analysts.
While Europe’s problems resulted in dips in India as well, each time stocks came back pretty quickly partly because investors realized that the Indian economy is not as dependent on exports to these developed countries as China is.
To be sure, Indian stocks have been pretty volatile this year. But overall, things seem to be moving in the right direction — the monsoon has been decent so far, inflation has not spiraled out of control and, most importantly, the Indian government has stuck to its commitment for pushing reform. The recent hike in fuel prices to reduce draining government subsidies, despite staunch opposition, has been encouraging for investors.
The last time Indian stocks performed better than those in China was during the downturn of 2008. When the Shanghai Composite fell 65.5%, the Sensex was down just 53%. On the rebound, China was stronger, gaining 80% in the calendar year 2009 versus 76.4% for the Sensex.
Will India continue to outpace China for the rest of this year? Let us know what you think in the Comments.