Macquarie sees China's recent pivot as anything more than an attempt at de-risking and underwriting growth targets, with policies remaining underpowered from consumption and real estate perspectives. 
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Macquarie sees China's recent pivot as anything more than an attempt at de-risking and underwriting growth targets, with policies remaining underpowered from consumption and real estate perspectives. Macquarie in its latest strategy note said India versus China remains the single most important question facing emerging market (EM) investors, and it is becoming harder to make this choice. But given the structural issues with China, it believes Chinese equities are mostly a trading, not an investment call. India is, it said.
It argued that India's equities are facing triple negatives: weakening GDP growth, high EPS expectations of 17 per cent and historically the highest multiples at 23 times.
From the flow perspective, while domestic liquidity is continuing to build, the last two weeks have seen meaningful $7 billion net foreign equity outflows.
"Finally, despite some recent erosion, MSCI India is still seating on 70 per cent cumulative four year outperformance. Second, on the other side, investors expect that China will ultimately embark on meaningful stimuli that will not only underwrite 2024 growth but extend into 2025-26," the foreign brokerage said.
A few investors believe that China will address its deeply imbedded structural challenges. At the very least, they expect China to be able to place the floor under nominal and real GDP, helping corporates to deliver something close to the current (10-11 per cent) EPS estimates.
Macquarie said there is a perception that the Chinese government is finally focusing on the economy, and hence, it is likely to underplay political, geopolitical and regulatory issues. "Finally, MXCN remains relatively cheap (10 times), and is seating on 35 per cent cumulative four year underperformance. Under normal circumstances, it would be easy to argue that China's recent rebound should continue. But, these are not normal times," Macquarie said.
China too has problems
First, investors should not expect any meaningful global acceleration to propel China's exports, Macquarie said.
The opposite is true, with sub-standard global growth (2.5 per cent) amplified by a hostile trade and investment climate: from stagnating trade elasticities to a rising tide of tariff and protectionary measures.
"This is poor news for China, but India prefers a “Twilight” of not too strong or weak growth, and it is not subject to the same pressures," Macquarie said.
Second, the foreign brokerage does not view China's recent pivot as anything more than an attempt at de-risking and underwriting growth targets, with policies remaining underpowered from consumption and real estate perspectives.
It sees the recent steps as a moderate clean-up of LGFVs and local debt, some stabilisation of real estate and minor changes in consumption and welfare spending, without addressing structural issues of high savings and reliance on investment and exports.
"On the other hand, India will continue to add labor and capital while growing productivity. Although 8 per cent growth is out of reach (requires higher domestic productivity and efficiency of capital), the economy should expand at 6-7 per cent, implying a steady double-digit nominal GDP growth (vs 4 per cent for China)," Macquarie said.
Besides, Macquarie expects the domestic corporates should deliver much stronger return on equities (ROEs) of 16-17 per cent against 9 per cent by Chinese corporates.
Hence, the dilemma.
Macquarie said while it is quite possible that further announcements might propel China's equities, even as structural issues fester. But, this is mostly a trading, not an investment call that still heavily favors India.
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