FTSE China A50 struggles to catch up with Nifty 50

The FTSE China A50's rally has literally stalled since March when the Chinese government announced a raft of fiscal stimulus to revitalise the plateauing economy and plunging stock market.

While earlier this year Japan's Nikkei 225 surpassed the previous all-time high in Dec 1989, apparently it will also be an arduous journey for the A50 to retest its peak around 23,000 hit in 2007.

China's State Council recently published the "Nine-Point Guideline", which includes measures to encourage dividend payment and plug corporate governance loopholes.

Local investors are hoping those measures will mirror Japan's efforts to boost the value of listed companies. Several Wall Street banks lately echoed the view, such as UBS and Goldman Sachs.

UBS Group raised its recommendation on a key Chinese stock index to overweight in a rare upgrade call this year, given early signs of a pickup in consumption.

In light of improvements in shareholder returns, corporate governance standards, and institutional investor ownership, Goldman’s analysts project significant potential upside for A-shares.

The growing confidence has been in part spurred by stronger-than-expected China Q1 GDP after rating agency Fitch downgraded its outlook on the country from neutral to negative this month.

High concentration

According to LSEG data, food beverages and tobacco ranks highest (27.85%) among all sectors within the A50, followed by banks (21.31%). The third largest sector accounts for less than 10% of the index.

China's consumer prices edged higher in March against a year earlier, missing forecasts. Analysts said CPI during the first two months of the year was boosted by the Lunar New Year holiday.

Retail sales expanded 3.1% in March, down from 5.5% for the January-February period. Tobacco and liquor sales witnessed a notable growth of 12.5% while beverage sales grew 6.5%.

The figures are in line with the rosy picture painted by liquor giants’ quarterly earnings reports. Maotai's Q1 revenue increased by 18% year-on-year with a slightly lower net profit margin of 54.4%.

IWSR’s research conducted among middle and upper-income Chinese consumers showed that broader economic concerns are becoming less influential in the premiumization trend within the industry.

Premium liquor brands, which make up of a good part of the index, will benefit from "drinking less but better,” which leaves plenty of room for additional upside in the sector.

But the banking sector does not look that promising given ailing property market. China announced its biggest ever reduction in the benchmark mortgage rate at the end of February.

The attempt to stem a prolonged property crisis is yet to take effect with residential real estate investment down 10.5% and new housing starts tumbling 27.8% by construction area year-on-year in Q1.

Real estate led the latest wave of defaults between 2020 and 2024, according to S&P. Vanke is going the way of Evergrande and Country Garden, which both defaulted on their debts and are at risk of being liquidated.

Competing poles

Asia will contribute roughly 60% of global economic growth this year and India and China are projected to be the biggest drivers, the IMF said in its latest outlook.

But the Indian stock market has outperformed its more developed neighbour for a long stretch with the benchmark Nifty 50 index heading for its ninth straight year of gains.

India's more youthful population switched places with China in April 2023 to become the world's biggest nation. Deep political rifts between China and the US also adds to the appeal of the Asian market.

The country's ability to turn its economic expansion into corporate profits makes it a better prospect for investors than China, according to the latest Bloomberg survey.

The correspondents expect China's equity market to underperform India's over the next 12 months. Indian shares now make up 18% of the MSCI Emerging Markets Index, less than China's 25% weighting.

Indian equities attracted $25 billion in net inflows for the year through March, compared with just $5.3 billion for China. Despite that,"buy India, sell China" may have reached an inflection point.

More than 90% of emerging market funds are adding back their positions in mainland Chinese shares, which were underweight, while also dialling back exposure to India, according to HSBC.

"Some of our Chinese investments have become less valuable but the investment case for them has increased," said James Donald, head of emerging markets at Lazard Asset.

The fund manager's China portfolios are aligned with the index weight, while India "has been a source of negative attribution for our portfolios" due to its rich valuations, he said.

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