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While funds in May were selling Indian equities at the fastest pace in 22 months and buying Chinese stocks instead, Ashburton Investments Ltd was doing the opposite.
Falling valuations have "presented an excellent opportunity to build positions" in India at the expense of China, said Jonathan Schiessl, the head of equities at the UK-based Ashburton, which oversees $12 billion. His India equity fund has returned 79 per cent since its launch about three years ago, according to Schiessl.
Shares on India's S&P BSE Sensex index are valued at a 18 per cent discount to the Shanghai Composite Index, the biggest gap since November 2009. The Chinese measure has advanced 52 per cent this year, compared with a 1.1 per cent decline in the Indian benchmark gauge. The MSCI BRIC Index is up 11 per cent.
Backing Ashburton's case is India's brighter economic and earnings prospects than its Communist-ruled neighbour. India's economy grew 7.5 per cent in three months through March, beating China's seven per cent expansion, while the International Monetary Fund predicts India will outpace China in the current financial year.
Profits in companies on the Sensex will climb 45 per cent in the next 12 months, compared with a 33 per cent gain for the Shanghai Composite, analyst estimates compiled by Bloomberg show.
Fund outflows
"Investors are reducing overweight positions and buying into other interesting stories," Adrian Mowat, the Hong Kong-based chief Asian and emerging-market equity strategist at JPMorgan Chase & Co, said in an interview to Bloomberg TV India. "India was a big consensus overweight for a long time."
Foreign funds pulled a net $429 million from Indian shares in May, the biggest outflows since August 2013, and sold about $1.4 billion more of bonds than they bought. US-listed exchange traded funds (ETFs) that track Chinese equities in the mainland, Hong Kong and US lured $1.1 billion in new money over the past month, the second-most after Japan.
The Shanghai Composite jumped 1.7 per cent and the Sensex slid the most since May 6 on concern that Tuesday's cut in interest rates by the Reserve Bank of India won't be enough to offset the impact of deficient rainfall on economic growth.
Bills stalled
Just a year ago, Modi was seducing foreign investors and brokerages alike, as the Shanghai Composite languished near multi-year lows. BNP Paribas SA said India's "Reagan-Thatcher" moment would bring subsidy cuts, more investment and a simpler tax regime. Global funds agreed: they pumped a record $42 billion into Indian stocks and bonds in 2014.
Since then, major economic proposals, including a goods and services tax and a bill to make it easier for companies to buy land, have been stalled by his opponents, who control the Upper House of Parliament.
"Investors are happy with Modi's vision but there's an element of skepticism over the speed of change and the ability to execute reforms," Hugh Young, Singapore-based Asia managing director at Aberdeen Asset Management Plc, said in reply to e-mailed questions. "We have taken two per cent out of India in total" to invest in other Asian nations, including China, he said.
BRIC performance
The Shanghai Composite Index has rallied 141 per cent in the past 12 months and trades at 18.4 times projected 12-month earnings, while the Sensex is valued at 15, down from April's peak of 16.9 times. Indian shares also lag behind equity indices in the other BRIC nations --- Brazil and Russia --- which have climbed from five to 17 per cent this year.
India's underperformance makes its shares more attractive for Ashburton, whose Chindia Equity Fund has beaten 90 per cent of its rivals over the past three years, according to data compiled by Bloomberg. Foreign investors' hopes that Modi would unleash the country's economic potential in his first year were always "unrealistic", Schiessl said.
"Modi is pushing up against the checks and balances of democracy, which is frustrating for short-term market watchers, but to us it is expected," he said. "A lot of hot air has gone out of the India story and that's a very healthy development."
