From dragon to elephant — The shift in global investments

Structural headwinds facing China's economy, such as adverse demographics, deglobalisation, and debt issues in the real estate sector, are adding to the pessimism

By Aditya Sinha

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Published: Sun 11 Feb 2024, 10:53 PM

Over the past few decades, China emerged as a pivotal hub for global investors, distinguishing itself from other emerging markets through its robust economic trajectory, expansive consumer base, and strategic position in international trade networks. This investor inclination towards China was underpinned by technical factors such as superior liquidity, diverse market sectors, and a regulatory environment that, while sometimes challenging, offered substantial growth opportunities. The technical analysis of investment patterns reveals a significant concentration of foreign direct investment (FDI) and portfolio investments in China, driven by its integration into the World Trade Organisation (WTO) and the gradual liberalization of its financial markets. These technical aspects made China an attractive proposition for global capital, seeking not only returns but also a foothold in one of the world's fastest-growing economies.

However, the investment landscape began to shift due to a confluence of technical, geopolitical, and economic factors. The recalibration of global supply chains, exacerbated by the US-China trade tensions and the Covid-19 pandemic's disruptions, highlighted the vulnerabilities of over-reliance on a single market, no matter how large or dynamic. The structural headwinds facing China's economy, such as adverse demographics, deglobalisation, and debt issues in the real estate sector, are adding to the pessimism.

Technically, investors started to reassess risk exposures, leading to a diversification strategy that favoured other emerging economies with promising growth trajectories, improved governance, and strategic geopolitical positions. The technical analysis of emerging market funds and ETFs excluding China underscores this trend, showing a marked increase in allocations to countries like India, Vietnam, and Brazil. These markets presented not only alternative manufacturing hubs but also burgeoning consumer markets, underpinned by demographic trends and digital transformation, offering a compelling narrative for investment reallocation.

India's economic landscape is evolving into a magnet for global investments, driven by a youthful demographic, rapid urbanisation, and a burgeoning digital economy. For instance, capital flows show a divergence from China to India. In the U.S. exchange-traded fund market, the main fund buying Indian stocks received record inflows in Q4 of 2023, while the four largest China funds combined saw outflows of almost $800 million.

Government-led reforms, including the Goods and Services Tax (GST) and improvements in ease of doing business, have significantly enhanced India's investment climate. This, combined with a growing middle class fuelling consumer demand, sets India apart as a dynamic market with high growth potential. India's stable and transparent market conditions are attracting investors looking for reliable long-term opportunities.

Goldman Sachs strategists have endorsed India as the prime long-term investment destination, reinforcing the nation's rising prominence in the global equity market. India's stock market has recently surpassed Hong Kong, becoming the world's fourth-largest, with a valuation of $4.33 trillion. This achievement is attributed to India's expanding retail investor base, robust corporate earnings, and its positioning as an attractive alternative to China. The influx of over $21 billion in foreign investments in 2023, marking the eighth consecutive year of gains for the S&P BSE Sensex Index, underscores the growing confidence among global investors in India's market potential. Goldman Sachs has also projected that India will overtake the U.S. to become the world's second-largest economy by 2075, indicating a long-term confidence in India's economic trajectory.

Similarly, Fitch Solutions, a division of the Fitch Group, is optimistic about India's economic future in the 2020s, dubbing it "India's Decade: A Journey Towards Global Economic & Industry Leadership." The firm predicts India will be the fastest-growing large economy, with an average real GDP growth of 6.4% per year from 2023 to 2032, making it the world's third-largest economy at USD 6.8 trillion, nearly double its current size. Fitch anticipates India will shift towards a manufacturing-led economic model, supported by demographics, economic reforms, global trade diversification, and banking sector development. Additionally, Fitch Ratings has affirmed India's 'BBB-' rating with a stable outlook, highlighting a strong growth outlook and resilient finances. The Indian government's aim for fiscal consolidation, targeting a deficit of 5.8% of GDP for the fiscal year ending March 2024, further underscores this positive outlook.

Further, The International Monetary Fund (IMF) has projected a robust growth rate of 6.5% for India's economy in the financial year starting April 1, 2024, and a similar pace the following year. This strong growth projection, even amidst a decline in the wider region of "developing Asia", is a testament to the resilience of India's domestic demand. The IMF has also revised its projections for GDP growth in the world's fifth-largest economy during the current financial year to 6.7% from 6.3% in October. India's GDP growth is projected to be over 2 percentage points higher than China's every year over the forecast horizon, and it is set to pick up some manufacturing business that moves away from China

India's economic growth is significantly influenced by political stability at the national level, especially with the prospect of Narendra Modi securing another term. This stability has facilitated the implementation of reforms and policies conducive to economic development. The government's focus on fiscal consolidation, as evidenced by setting a lower fiscal deficit target, and emphasis on rural economy and infrastructure, are key indicators of a strategic approach to bolster economic growth. Confidence in Modi's re-election suggests a continuation of these growth-oriented policies, further enhancing India's attractiveness as an investment destination.

Aditya Sinha (X: @adityasinha004) is Officer on Special Duty, Research, Economic Advisory Council to the Prime Minister of India. Views personal.

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