Major sovereign wealth funds and public pension schemes are increasingly favoring India over China due to concerns surrounding Beijing’s interventions in regional companies. According to a survey conducted by the Official Monetary and Financial Institutions Forum (OMFIF), India emerges as the preferred emerging market for 40% of the 100 surveyed funds, while China only garners support from less than a quarter, placing it on par with Brazil in joint-second place.
This shift in investor sentiment poses a risk for China, as these funds collectively command a financial firepower of $25.9 trillion (£20.5 trillion). Approximately 75% of respondents expressed reluctance to invest in China, citing concerns about the regulatory environment and geopolitical factors. Notably, the primary motivation for investing in China is for diversification purposes and inclusion in benchmark indices.
In a departure from previous surveys, none of the funds indicate investing in China with expectations of higher relative returns or positive outlooks for Chinese growth. The hope for a strong economic rebound from China in 2023 was dampened by a deepening property crisis and disappointing growth, further dissuading investors.
Craig Thorburn, a director at Future Fund managing Australia’s wealth, reveals a reduction in their exposure to China due to increased intervention in market sectors and economic growth challenges. Analysts, including Nikhil Sanghani at OMFIF, observe a shift in tone among long-term funds, indicating a more cautious approach towards China. While immediate divestment is unlikely, these funds are expected to make fewer new investments in China.
Sanghani notes the growing appeal of India, especially as it is set to benefit from increased passive investment inflows, with its government debt being added to JP Morgan’s emerging markets government bond index from June. He attributes India’s attractiveness to its solid economic performance compared to China, which faces structural headwinds and geopolitical tensions.
Sanghani expects pension funds to play a crucial role in future economic growth, given the limited fiscal space governments have for financing major schemes. He emphasizes the importance of mobilizing existing pools of capital, both domestic and foreign, to address pressing issues like the energy transition.
As India’s economy is predicted to outgrow China’s for the third consecutive year, its stock market capitalization is gaining ground on China’s. Analysts highlight India’s favorable demographic outlook and long-term growth potential as contributing factors to its attractiveness to international investors.