India vs China: the battle of the two biggest emerging markets

• India’s stock market had been running circles around China’s, but recent macroeconomic shifts have suggested that the tortoise may be stealing a march on the hare
• After years of absence, investors have been enticed back to China’s market by fresh stimulus packages, technological breakthroughs, and cheap valuations
• India’s stocks have fallen 24% since September, but with a fairly promising outlook, that could present investors with a more cost-effective buying opportunity

China and India are a tale of two economies. Despite sitting next to each other in the ranking tables as the world’s two biggest emerging markets, the duo have been dealt opposing cards in recent years. China’s economy has been plagued by a series of unfortunate events, encouraging investors to bow out of the country’s stocks. India, meanwhile, has been touted as one of the world’s fastest-growing economies – so naturally, investors have rushed to carve out a corner in their portfolio for Indian stocks. But get this: over the last twelve months, the two have swapped fortunes. Let’s see what gives.

What’s been happening with Indian and Chinese stocks?

There’s no mystery behind China’s stock market shortcomings. The country has been long held back by serious, deep-rooted macroeconomic challenges. And a lot of them: an aging population, an imploding property market, weak consumer confidence, high debt levels, fraught geopolitical relations, and disappearing foreign investment. It’s little surprise, then, that China’s main index has only picked up by 11% over the last five years, while Hong Kong’s Hang Seng index has fallen by 17%.

India’s fortunes might have been salt in the wound. The country has a young and growing population with an expanding middle class, leading to predictions that the economy will grow by 6 to 7% a year over the next decade. Add in government reforms targeting the stock market, and you can see why investors were won over. In their droves, too: the key Sensex index rose 84% over the last five years.

But hey, now that pattern seems to be shifting. India’s Sensex has risen by a comparatively tiny 5% in the last year, while China’s index is up 14% and Hong Kong’s 42%.

Why did their fortunes switch?

China’s luck started changing late last year, after a significant stimulus program was rolled out in an attempt to massage away those heavy challenges. And while the package was never expected to push the stock market into a lasting rally, it did provide a bit of a bolster. After all, investors – somewhat reassured by the efforts to fix the economy – were attracted by the cheap prices of the still-unloved stocks: China’s main index had been trading under a 10x price-to-earnings ratio based on the next 12 months' consensus estimates (PER NTM), cheap relative to its recent history.

Then this year, the launch of DeepSeek’s latest AI model – touted as a suitable rival for OpenAI’s ChatGPT, but made and trained for far less – reinvigorated investors’ faith in China’s tech sector. As a result, Chinese tech stocks quickly picked up. The government has changed tact, too, paring back its harsh regulatory regime on private Chinese companies. In fact, the country’s president recently met with top Chinese entrepreneurs including Alibaba Group Holding Ltd ADR (NYSE:BABA)'s Jack Ma and leaders from Huawei, Xiaomi Corp Class B (SEHK:1810), CATL, Meituan Class B (SEHK:3690), Tencent Holdings Ltd (SEHK:700), and BYD Co Ltd Class H (SEHK:1211), promising “unwavering” support.

The result of all that: China’s tech-focused HSBC Hang Seng Tech ETF GBP (LSE:HSTC)rose 69% over the past year and 25% this year alone. Check the chart below, and you’ll see that Chinese ETFs that track the broader market (purple and blue) have pulled off strong rallies, although they’re still trading for less than their October highs.

The one-year performance of MSCI China ETF (purple), SPDR S&P China ETF (blue), HSBC Hang Seng Tech ETF (green), and Invesco India ETF (orange). Source: Koyfin.

Now let’s fly over to India. Recently, the economy has slowed from an annual growth rate of above 7% to around 6.5%. That’s shaken investors’ confidence in the country’s stocks – especially because their high prices have left little room for error. With so many foreign investors leaving to find better investment opportunities elsewhere, India’s main stock market is now down 24% from its September high and is trading at a 22x PER NTM – still rich, but noticeably lower than before. That said, domestic investors are still backing Indian stocks, which has historically been a promising sign for an economy.

What might happen next?

China’s stocks were cheap for a reason. Many reasons, actually – and they’re far from resolved today. Add in the US’s threat of higher tariffs, and the economic outlook could be better. Still, the country’s tech sector is looking like a gem again, with Goldman Sachs estimating that widespread AI adoption could increase China’s corporate profit by 2.5% a year over the next decade. That, plus a lift in investor confidence, could raise the value of Chinese stocks by 15 to 20%.

Still, for China to pull off a fully fledged economic recovery and a sustained stock market rally, the government will probably need to roll out additional stimulus packages.

Cheap valuations – MSCI China at 11x PER NTM and strong price momentum are reasons to be positive about Chinese stocks. Chinese investors certainly seem optimistic, regardless. They bought $2.9 billion worth of Hong Kong’s stocks on Tuesday [18th February] – that’s the biggest daily purchase since early 2021 and the fourth-biggest on record.

India’s outlook is arguably more straightforward. The economic slowdown is expected to blow over: the central bank recently cut interest rates and is committed to adding liquidity into markets while easing regulations on the financial sector. That should encourage banks to loan more money, and that should spur on consumer spending and, in turn, the economy. And while tariffs are a threat for India, too, they’re not expected to be as damaging as China’s. So with company earnings projected to grow between 11 and 17% a year over the next three to five years, the recent stock market blip could offer investors an opportunity to buy in for less.

Russell Burns is an analyst at finimize.

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