China stock market may outperform India in short term but Nomura has a warning

Nomura in its latest Asia-ex Japan Equity Strategy note retained its 'Neutral' stance on China and 'structural Overweight' on India stocks. The foreign brokerage said there is a scope of near-term outperformance of China over India, but it may not be long-lasting. 

India's stock market benchmarks Sensex and Nifty have fallen 5 per cent each in 2025 so far, against a 4 per cent jump each for CSI 300 and Shanghai Composite index. 

As per Nomura, MSCI China stocks may temporarily overshoot its end-2025 target in the near term, potentially reaching its bull-case multiple of 13 times, driven by positive momentum, underweight positioning, attractive valuations, and accelerating Southbound flows. On India, it said there remains a risk of further multiple compression due to the positive China narrative, and domestic local factors. 

India stock market outlook 
Nomura said its main concern remains somewhat still-elevated valuations -- 21 times for MSCI India, against since 2015 and 2022 averages of 19.6 times and 21.5 times, respectively. "In our October note, we had noted “valuations don't matter until they do”, and had noted that 21 times would become an attractive point to rebuild positions. We think this has been playing out, but given the optimism on China post-DeepSeek, and investors having an alternative in China, we see scope for further multiple compression in the near term," it said.

Nomura said the positive narrative on India is also being tested amid a slowing economy and corporate earnings, and earnings estimate downgrades; tight banking sector liquidity. Some tariff risks from the US administration against a consensus view that India might be almost unharmed; and a weakening and underperforming rupee exacerbated by persistent and heavy net-selling from foreign investors, creating a vicious spiral. 

Despite a decadal low ownership at 16 per cent in end-January, foreign investors still own $782 billion of Indian stocks, which still appears elevated compared to pre-pandemic levels, suggesting scope for more net-selling ahead so long as the positive China narrative stays in place. 

Nomura said while domestic equity flows from retail into domestic mutual funds have so far been very resilient, investors also seem to be concerned that those might be the next shoe to drop, completing what might be the full capitulation and the time for foreign investors to buy.

"Broader markets (NSE500) also appear technically oversold, with the percentage of stocks above 200DMA in NSE500 and the Nifty Index close to record lows. Historically, that implies positive performance +3/+6/12 months with high hit-rates – a key caveat is that valuations today are much higher than during previous bottoms. Another silver lining is that EM equity investors are already underweight India, with a larger underweight on India equities compared to HK/China equities, based on our survey of large EM funds," it said.

China stock market outlook
On China, Nomura said while it retained its 'Neutral' stance, it continued to believe that investors should overweight China’s technology-related sectors,  citing many incremental positives including the DeepSeek/AI narrative.

"China or Hang Seng, we think the gains in such stocks have also supported these benchmarks. Our sense is this positive narrative should continue to be supportive in the near term (so long as there are no significant actions from the US administration on the trade or tariff front)," it said.

Nomura said investors are still underweight on China, its southbound Inflows accelerating, the economy and corporate earnings is stabilising and valuations still do not appear exuberant.

However, it sees several risks as well. It cited US-China tensions, where the White House’s “America First Trade Policy ” and “America First Investment Policy ” designates China a key foreign adversary.
While markets have been relieved by less hawkish actions by the US administration (10 per cent tariffs on China against general expectations of 25-30 per cent, Nomura stayed concerned about further escalation – although timing remains an uncertainty. 

"Eventually, we believe some sort of compromise or a deal may be possible, but the path to that outcome will be bumpy and volatile," it said.