Stock market reacts to China stimulus: Is there further dip in Sensex, Nifty?

Despite some analysts hoping that foreign portfolio investment (FPI) outflows from India might reverse, further declines in Indian stocks cannot be dismissed, as per experts.

In Short

• China's stimulus news boosts Chinese shares by 10%
• Sensex, Nifty may face pressure from foreign outflows
• Global tensions, rising oil prices challenge Indian markets

The news of China's anticipated stimulus measures has led to a significant 10% rise in Chinese shares, which is causing concerns about potential foreign outflows from Indian markets. As a result, Sensex and Nifty could face additional pressure in the coming days. Early indicators, including Gift Nifty futures, suggest a weak opening for the domestic market today, reflecting investor caution amidst global market movements.

Foreign brokerages have become more optimistic about Chinese stocks. Goldman Sachs recently advised investors to trust the People’s Bank of China (PBoC), which is implementing significant and unconventional support for Chinese markets. They said that the current situation is different from past market responses, suggesting that investors are finally receiving the support they have been waiting for.

"The pullback risks may have risen after 30 per cent gains in 2 weeks, but policy (U-turn) provoked re-rating trades have seldom stopped there," said Goldman Sachs.

Despite some analysts hoping that foreign portfolio investment (FPI) outflows from India might reverse, further declines in Indian stocks cannot be dismissed. This is partly due to rising crude oil prices driven by tensions in the Middle East, increases in US bond yields, and expected lower earnings growth from Indian companies. Additionally, the results of state elections today could impact how investors feel about the market.

Vinod Nair, Head of Research at Geojit Financial Services, said that Indian markets are currently in a consolidation phase, which may lead to underperformance compared to other Asian markets. This phase is characterised by significant corrections in the broader market due to high valuations. He further said that many global investors are now shifting their portfolios, and recent outflows from foreign investors have added to the pressure. The ongoing geopolitical tensions and rising oil prices pose further challenges to India’s economy in the short term.

Investment firm CLSA has adjusted its model portfolio, increasing its focus on China to 5% overweight while reducing its overweight on India from 20% to 10%. Similarly, Jefferies' analyst Chris Wood has decreased India’s weight by 1% while boosting China's weight by 2%.

The National Development and Reform Commission (NDRC) in China is expected to announce a stimulus package today, with further announcements from the Ministry of Finance in the coming weeks. The focus is likely to be on supporting local government financing and recapitalising six major banks. There may also be some boost to consumer spending and social benefits.

Morgan Stanley believes that the size and timing of the Chinese stimulus will be well-received by investors, as it shows the government’s commitment to economic recovery through targeted policy actions. They anticipate that a stimulus of around 2 trillion yuan could be on the way, and they expect the positive market reaction in China to continue.

According to Morgan Stanley, there could be an additional 12% or more upside in the near future, driven by improved valuations. They expect an increase in demand for diversification and investment, which could lead to further inflows. Large-cap internet companies and other consumer-focused businesses are likely to benefit from swift fiscal measures and improved economic signs, thanks to their appealing valuations and high liquidity.

Morgan Stanley has observed that major Chinese indices have reached or exceeded the peaks seen in 2023 after the pandemic. However, sectors like ChiNext and the Chinese internet market still lag behind, trading at discounts of 27% to 37% compared to 2023 highs and five-year averages. In contrast, the Starboard index is trading at a premium relative to both the 2023 peak and the five-year average.