Investors are eyeing China’s neighbors as the recovery from ‘zero-Covid’ slows

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June 12, 2023
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Pedestrians in front of a pawn shop during Golden Week at night in Macau, China, on Sunday, April 30, 2023.

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China’s lackluster economic recovery since emerging from strict “zero-Covid” lockdowns has caused weaker sentiment toward the country, prompting investors to look for alternative options — like its near neighbors.

In particular, stock markets in Japan, South Korea and India have all been major beneficiaries of the disappointment from China’s reopening, highlighted by softer-than-expected data from the world’s second-largest economy.

“Amid China weakness, investors have looked elsewhere in the region for opportunities,” Goldman Sachs Chief Asia-Pacific Economist Andrew Tilton said in a Friday research note, adding that Japan “is in the limelight” while India has “also returned to focus in recent months.”

The Nikkei 225 is in bull market territory, up by more than 23% year-to-date thanks to garnered interest from foreign investors, including Berkshire Hathaway’s Warren Buffett.

India’s Nifty 50 index has rallied nearly 7% so far this quarter and pared all of its losses from its March low, while South Korea’s Kospi index has risen 18% year-to-date.

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That shows a stark contrast to a sell-off seen in the Chinese stock market. The CSI 300 index, which measures the largest companies listed in Shanghai and Shenzhen, has fallen 5.29% quarter-to-date and has erased all of its gains seen earlier in the year, when stocks rallied on reopening momentum.

The Hang Seng index also touched bear market territory last month and is down nearly 2% year-to-date, Refinitiv data shows.

HSBC’s chief economist for India and Indonesia, Pranjul Bhandari, said ahead of the Indian central bank’s June meeting that keeping rates unchanged would be “allowing the perfect macro mix to continue,” pointing to raised growth and lowered inflation forecasts.

The firm also raised India’s full-year gross domestic forecast for 2024 from 5.5% to 5.8% and expects the RBI to deliver two rate cuts in the first quarters of 2024, bringing its repo rate to 6% by mid-2024.

“India’s economy is much improved from a year ago,” Bhandari said. “GDP growth momentum has been steady as per the latest high frequency data, with the informal sector picking up the slack as the formal sector growth softens,” she said.

The Reserve Bank of India held its benchmark repo rate steady at 6.50% last week for the second consecutive time — in line with market expectations.

The Organization for Economic Cooperation and Development also expects India’s economic growth to outpace that of China this year and next, it said in its latest global outlook report.

“Growth has surprised on the upside recently, and we believe an improving informal sector is at the heart of it,” Bhandari said. “Rising state government spending, and some cushion in the central government budget to support social welfare schemes, is likely to remain supportive of informal sector demand.”