Even in a global bull market, like the present one, there will be significant underperformances and outperformances by some markets. Last month presented an interesting case of major variations in performances. During the one-month period from 22nd April to 17th May, the Indian stock market underperformed. While the S&P 500 and Euro Stoxx 50 appreciated by 5.84 percent and 2.58 percent respectively during this period, Nifty was flat with only 0.74 percent appreciation. Significant outperformance was registered by Shanghai Composite SSE and Hang Seng indexes: Shanghai Composite appreciated by 4.19 percent during this period while Hang Seng boomed by 18.42 percent. These major variations in performances are caused by many factors, economic and non-economic. Getting a correct perspective of these developments will help in formulating appropriate investment strategies.
Cheap Chinese stocks bounce back
China’s serious economic issues have been impacting its stock markets for long. Now there is a global consensus that China’s growth will be very low, below 4 percent, for many years to come. The crisis in the real estate market which accounts for around 24 percent of the Chinese GDP has been plaguing the economy for a long. Declining population is another major long-term negative. The Chinese government’s policy of putting restrictions on many Chinese companies has impacted their corporate sector and its profitability. Consequently, the Chinese stock market has hugely underperformed other markets for many years. The Shanghai Composite is even now 45 percent down from the peak of 2007 and Hang Seng is down 40 percent from the 2018 peak. Such a long period of underperformance has disappointed foreign investors who fled China impacting their markets further. There are restrictions on foreign investors investing in Chinese shares (A shares) listed on the Shanghai Exchange. Foreigners invest in Chinese shares (H shares) listed in Hang Seng. A long period of underperformance and foreign investor disillusionment led to the crash in Chinese valuations. The PE of Shanghai Composite dipped below 10, and the PE of Hang Seng fell below 9.
The last month has witnessed a reversal of this long-term trend. As mentioned earlier the Shanghai and Hang Seng markets are outperforming and this has brought investors back to Chinese shares. FIIs have been selling in expensive emerging markets like India and buying cheap Chinese stocks. The important question is: how long will this new trend last?
This month, FPI selling in the cash market has been relentless. Up to 19th May, FPIs have been sellers on all trading days except one, and have sold equity for Rs 35,625 crore. This has contributed to the underperformance of the Indian market. DIIs have been buying, but HNI and retail investors appear to be in a wait-and-watch mode due to new developments on the political front.
Election jitters unnerve the market
Election-related news also impacted the market. The lower turnout in the first three phases of elections has led to debates on its impact on the fortunes of the ruling dispensation and the Opposition alliance. There are claims and counterclaims. The fact is that nobody knows the likely impact. Electioneering and speeches by the leading leaders have become more intense and shriller. Political pundits are of the view that the certainty surrounding the election results, which was very high when the elections began, has declined now. Since the market had largely discounted an NDA/BJP victory, the new development is causing some jitters contributing to the market weakness.
Even now, the base case scenario is political stability. Therefore, as clarity emerges on the political front, the market is likely to bounce back. DII, HNI and retail buying has the potential to effectively counter FII selling forcing a turnaround in the market. Therefore, investors can exploit the weakness in the market to accumulate high quality large caps which are fairly valued now.
