Stock market: China stimulus today! Will Sensex, Nifty fall further? 

Anticipation of a fiscal stimulus announcement for the anemic Chinese economy sent Chinese shares soaring 10 per cent today, as they resume trade after seven days of National Day holidays. This may raise fears of further foreign outflows from India. Gift Nifty futures were already trading lower in early trade, suggesting a weak start for the domestic market later today.

Foreign brokerages are turning positive on Chinese shares. Goldman Sachs in its latest note asked investors not to fight PBoC, the Chinese central bank, which is extending unprecedented and unorthodox support to Chinese equity markets. It said this time is different in terms of policy response, and investors of Chinese equities are getting what they were hoping for to a large extent. 

"The pullback risks may have risen after 30 per cent gains in 2 weeks, but policy (U-turn) provoked re-rating trades have seldom stopped there," it said.

While a few analysts hoped the recent FPI outflow trend to reverse, further pain for domestic stocks in the short-term cannot be ruled out, thanks to rising crude oil prices on account of Middle East tensions, a jump in the 10-year US bond yields and a likely moderation in India Inc earnings growth. State elections results today could also influence investor sentiment. 

"The Indian markets have entered a consolidation phase with high risk of underperforming to Asian peers. This phase is marked by significant corrections in the broader market due to premium valuations. There is notable global arbitrage activity, with Chinese markets attracting substantial inflow,s driven by its attractive valuations and stimulus measures," said Vinod Nair, Head of Research, Geojit Financial Services.
 Data showed foreign investors have pulled out Rs 36,787 crore from Indian stock market in October so far.

Nair said investors globally are reassessing their portfolio positions and FIIs outflows are exacerbated. Amid escalating geopolitical tensions, the surging oil prices poses a further challenge to the domestic economy, in the short-term."

CLSA in its model portfolio has raised China to 5 per cent overweight by slashing India overweight to 10 per cent from 20 per cent earlier. Earlier, Jefferies' Chris Wood cut India weight by 1 per cent, while increasing China's weightage by 2 per cent.

The NDRC press conference today may announce the first batch, followed by the Ministry of Finance in the next few weeks, Morgan Stanley said. The key focus will be on support for local government financing and the recapitalisation of six major commercial banks, but there may also be a modest boost to consumption and/or social benefits, it said.

Based on the marketing feedback, the size and timing of the Chinese stimulus will likely be viewed positively by onshore investors, as it reaffirms Beijing's commitment to reflation with more concerted policy efforts, albeit using the time-tested trial-and-error approach, Morgan Stanley said.

The foreign brokerage sees a 2 trillion yuan coming and believes the tactical rally in the Chinese market is likely to continue.

"Another 12% or more near-term upside could be driven by a valuation re-rating to narrow the gap with EM. Rising demand in diversification and benchmarking could drive more inflows and upside. We see large-cap internet and broad consumption names as well positioned should swift fiscal policy measures come through and macro signs improve, given attractive valuations and high liquidity," it said. 

The brokerage noted that valuations for major Chinese indices have all largely hit or surpassed 2023's post-Covid reopening peak. Similar observations can be seen against the 5-year average level. 

At the sub-index level, ChiNext and the China internet space are still significantly lagging the rally, trading at 27-37 per cent discounts to 2023's peak and the 5-year average. Starboard is the exception, trading at a premium vs 2023's peak (up 21 per cent) and the 5-year average (8 per cent).