Post-Boom: India vs. Japan Stock Market Dichotomy
As the two stock markets with the strongest upward momentum in Asia over the past year, the recent trends of the Indian and Japanese stock markets have diverged. The Indian stock market has continued to weaken, with both major stock indexes falling by more than 6% over the past month. Foreign capital has sold $10 billion worth of Indian stocks over the past 15 trading days, setting a new monthly record for sales. In contrast, the Japanese stock market has recorded inflows of foreign capital for four consecutive weeks.
Analysts have been downgrading their ratings for the Indian stock market, expecting the weak trend and outflow of foreign capital to continue for some time. For the Japanese stock market, analysts remain optimistic about its fundamentals but believe it may face competition from the Chinese stock market in the short term.
The weakness in the Indian stock market is expected to continue. According to public data, since the end of September, foreign portfolio investors (FPIs) have been net sellers of Indian stocks, accumulating sales of $10.1 billion over the past 15 trading days, breaking the historical record for the largest monthly sales, surpassing the $8.35 billion outflow record set in March 2020 during the COVID-19 outbreak. On October 24, the Indian SENSEX30 index closed down by 0.17%, at 80,081.98 points. Since the start of this round of adjustments on September 27, both the SENSEX30 and Nifty50 indexes have fallen by more than 6.5%. The Nifty50 index fell by more than 5% in October, potentially recording the worst monthly performance in over four years. Prashant Tapse, Senior Vice President of Mehta's stocks, stated: "Foreign investors are fleeing Indian stocks and investing in relatively lower-valued markets such as the Chinese stock market, especially after the Chinese government announced stimulus measures."
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Affected by this, the performance of newly listed stocks in India has also been less than ideal. On October 22, Hyundai Motor India's stock broke issue on its first day of listing. This initial public offering (IPO) was the largest in Indian history and the largest in Asia so far this year, raising a total of $3.3 billion, with a listing price of 1,934 rupees per share. However, due to concerns about overpricing, coupled with the recent downturn in the Indian automotive industry, Indian investors responded indifferently, and the stock fell by more than 7% on its first day of listing.
Market participants believe that the recent weakness in the Indian stock market may continue. On October 22, Goldman Sachs downgraded its rating for the Indian stock market from "overweight" to "neutral," lowering its 12-month target for the Nifty50 index from the previous 27,500 points to 27,000 points. Sunil Koul, a strategist at Goldman Sachs, cited the reason as the slowdown in India's economic growth weakening the outlook for corporate earnings. At the end of last year, Goldman Sachs had upgraded its rating for the Indian stock market to buy. In the latest report, Koul wrote: "Although structural positive factors still exist, economic growth in many regions of India is cyclically slowing down. The deterioration of corporate earnings confidence, the acceleration of earnings per share downgrades, and the weak start of the latest earnings season in September all indicate that corporate earnings are affected." He added that the high valuation of the Indian stock market and the less favorable background may limit its near-term upside potential. Given the support of domestic capital flows in India, the possibility of a large-scale "price correction" is small, but a "time correction" is expected within the next 3 to 6 months.
Chen Dong, Chief Strategist and Head of Research for Asia at Pictet Wealth Management, also recently told Yicai reporters that India's rise since the 2020 pandemic has accelerated rapidly and has strong fundamental support. Simply put, on one hand, the Modi government has been continuously reforming and investing heavily in infrastructure, with immediate effects, indeed making many Indian companies profitable. On the other hand, India also faces a more favorable international environment, with many multinational companies considering investing in India. Moreover, domestic Indian investors can continue to support its stock market. "Based on this, we continue to be optimistic about the Indian stock market in the long term."
However, in the short term, he said, he would be more cautious. On one hand, after a period of strong growth, the profit growth of Indian listed companies has begun to slow down in recent months, and profit growth expectations have been downgraded. On the other hand, compared with its own historical level, other emerging market stock markets, or developed economy stock markets, the current valuation of the Indian stock market is the most expensive.
Market participants also expect that, affected by the prospects of China's economic and market recovery, the selling of Indian stocks by foreign capital may continue. A survey by Bank of America last week showed that global fund managers are reducing their allocation to India and turning to China. Narendra Solanki, the head of basic research at Anand Rathi Stock Research, said: "It is hard to say when the outflow of foreign capital from India will stop, but it is expected that this volatility will continue until the eve of the U.S. election." Goldman Sachs had previously stated that capital inflows into the Chinese stock market make the Indian stock market more vulnerable. Foreign institutions are selling their largest and most liquid assets as quickly as possible to exchange for cash and invest in the Chinese market.Why Foreign Capital is Bullish on the Japanese Stock Market
Relatively speaking, the recent situation of the Japanese stock market is much better. On the morning of the 24th, during the trading session, Bank of Japan Governor Haruhiko Kuroda stated that the Bank of Japan hopes to raise inflation expectations to a new level. Most economists surveyed by the media predict that the Bank of Japan will keep the benchmark interest rate unchanged next week and then raise interest rates again in December or January next year. Boosted by this, the Nikkei 225 index surged by 500 points in a short term, erasing a previous 1% decline and turning positive. Data also shows that foreign major investors have been net buyers of Japanese equity securities for four consecutive weeks. In the week of October 18th, foreign capital net bought 580.4 billion yen worth of Japanese equity securities, and the previous week saw a net purchase of 972.6 billion yen worth of Japanese equity securities.
Swiss Lombard Odier has upgraded its rating on Japanese stocks, believing that regardless of the outcome of the U.S. election, the Japanese stock market is a "sweet spot". If Republican presidential candidate Trump wins, it will help the U.S. dollar to remain stable or strengthen, which is good for Japanese stocks. If Democratic presidential candidate Harris wins, raising tariffs may not be a policy option, which would also boost the Japanese stock market.
The recent weakening of the yen against the U.S. dollar also supports the continued strength of Japanese stocks. On the 23rd, the yen fell to 153.19 against the U.S. dollar at one point, and finally closed at the lowest level since the end of July. So far in October, the yen has depreciated by about 6% against the U.S. dollar, which may record the worst monthly performance since April 2022. Monex foreign exchange dealer Helen Given said: "Due to the Federal Reserve's cautious attitude towards interest rate cuts, U.S. Treasury yields have risen significantly, and the U.S. dollar has strengthened accordingly. The yen is once again on a dangerous path against the U.S. dollar, especially considering the very low possibility of the Bank of Japan raising interest rates again at next week's meeting." She expects that by the end of this year, the yen may further fall to around 155 against the U.S. dollar.
The biggest fundamental factor driving the rise of the Japanese stock market this round is that the Japanese economy is emerging from deflation, starting to implement wage increases, and corporate governance has also improved, which can be considered a "reflation trade", and this fundamental fabric is expected to continue. The complexity of the Japanese stock market outlook lies in the yen, that is, how much the yen will appreciate with the prospect of the Bank of Japan raising interest rates will affect the Japanese stock market. At present, if the yen is to have a significant impact on the earnings expectations of listed companies, it would have to rise to the 130s against the U.S. dollar, which seems unlikely at this point, "therefore, we are still relatively optimistic about Japanese stocks."
AllianceBernstein's senior market strategist, Huang Senwei, also said that the Japanese stock market is a market favored by foreign capital in recent years because the depreciation of the yen has boosted the performance of Japanese export companies. In recent years, Japanese listed companies have also been committed to corporate governance reform and improving shareholder returns, and Japan is gradually emerging from deflation.
However, after China has introduced a series of favorable policies, he believes that it is worth comparing the Chinese and Japanese stock markets in the short term. "No matter how good the macro environment is, it must be reflected in the earnings fundamentals of listed companies, and the valuation must match. The current price-to-earnings ratio of Japanese stocks is about 14.2 times, which is significantly higher than that of A-shares (12.6 times) and overseas-listed Chinese concept stocks (10.5 times); while the price-to-book ratio (P/B) of Japanese stocks is comparable to that of Chinese stocks, the return on equity (ROE) of listed companies is lower, which represents the possibility of convergence in valuations between the two stock markets." In addition, he said that Japanese stocks are already at a high level in recent years, implying that there may be a risk of being too crowded in the short term. On the contrary, the position of Chinese stocks is still at a low level in recent years, and the risk of being too crowded is not high. Furthermore, compared to the Bank of Japan's continued interest rate hikes, China's monetary environment is relatively loose, and the possibility of continuing to introduce stimulus policies is also higher, which means that for global funds, the imagination space for investing in Chinese stocks at this time may be higher than that for Japanese stocks.
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