MUMBAI, Dec 27 (ET Bureau): India's stock market has lost its numero uno ranking of being the best performer globally in 2014 to neighbour China in the last lap.
After superior performance to most emerging markets for most of 2014, Indian stocks lost popularity among investors in the last two months as the valuations have become rich following the rally.
China's Shanghai Composite Index surged over 49 per cent in 2014 against BSE Sensex's rise of 29 per cent in the period. But analysts believe that India can bounce back if the government announces pro-market measures as China faces the risk of a slowdown in the wake of the global downturn.
"We don't think Chinese equity market performance is sustainable, going forward, unless there is major surge in its economic activity whereas Indian economy is poised for significant expansion, which will also support both stock markets and foreign fund flows," said UR Bhat, managing director at Dalton Capital.
Global fund managers said Chinese market performance does not indicate improvement in economy. The rally in Chinese shares later in 2014 is due to the unexpected cut in interest rates and the government's decision to allow foreigners to buy China's mainland 'A' shares through the Hong Kong exchanges and vice-versa.
"We do not think that the strong rally is predicting an improving Chinese economy, at least over the near term. Recent share performance is more due to decrease in overall financing cost in the economy, and falling investor interest in real estate and wealth management products," said Jonathan Garner, managing director and head of global emerging market strategy at Morgan Stanley.
Expensive valuations of Indian stocks have led to emerging market investors increasing their portfolio weightage on China. Shanghai Composite Index trades at forward price to earnings (P/E) multiple of 13.29 times against BSE Sensex's 17.43 times, according to Bloomberg.
Die-hard supporters of India's growth story said the premium valuation of India is because of better growth prospects.
Goldman Sachs, in a recent report, said India may overtake China in terms of economic growth rate in coming years. The brokerage said India's gross domestic product (GDP) may grow at 6.5 per cent in FY16, and 7 per cent in FY17, while China's economy may expand at 7 per cent in calendar year 2015, and 6.7 per cent in calendar year 2016.
"Recovery in GDP will be choppy, but economic growth will pick up to 6.5 per cent in FY16 from the current 5.6 per cent. State governments will come in line to compete for investments and support Modi's recovery programme," said Amar Gill, CLSA Head of Asian Research.
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