Japanese Retail Investors Bet Big On Indian Equities; The Next China?

Japanese retail investors are channelling significant funds into Indian equities, fueled by speculation that India might emerge as the next economic powerhouse akin to China.

According to data compiled by Bloomberg, the total assets of investment trusts in Japan focused on Indian equities surged by 11% or ¥237 billion ($1.6 billion) in January. Factoring in the appreciation of Indian stocks relative to the yen, it indicates inflows of around ¥140 billion into Indian equity funds, while Japanese stock funds witnessed negligible net inflows.

The influx of investment into Indian stocks further solidifies India’s position as Japan’s favoured emerging stock market, partially attributable to newly introduced tax-free investment accounts this year.

Government data analyzed by Bloomberg reveal that India witnessed the highest increase in stock holdings among developing economies last year, considering both net purchases and asset prices.

Daiju Aoki, the regional chief investment officer at UBS SuMi Trust Wealth Management Co. in Tokyo, remarked, “Indian stocks are garnering attention as a growth theme, similar to the narrative around China. Client interest predominantly revolves around India’s overall economic prospects rather than specific companies.”

On the other hand, investment flows into Chinese shares experienced the most significant decline among the 14 emerging markets covered by Japan’s international investment position data, including both institutional and retail investors’ holdings.

This redirection of funds from Japan, the world’s largest creditor nation, coincides with China grappling with challenges such as the burst of a property bubble and deflation, reminiscent of the economic stagnation Japan endured for decades.

While India’s Nifty 50 Index remained nearly unchanged in local currency terms last month, it recorded a 4.2% increase in yen, reflecting the depreciation of the Japanese currency.
In contrast, the Shanghai Composite Index and the Hang Seng Index declined by 3.5% and 5.7%, respectively, for yen-based investors.

The Outlook For India
Economists project that India’s year-on-year economic growth will consistently exceed 6% at least until the second quarter of 2025, while China’s growth is anticipated to remain below 5% during this period.

Additionally, demographic trends favour India, with its population projected to grow by 17% by 2050 compared to a 7.9% decline expected in China, as per a United Nations report.

India is set to maintain its position as the fastest-growing major economy in 2024, having effectively navigated global challenges in 2023. Increasing demand, controlled inflation, a stable interest rate environment, and robust foreign exchange reserves underpin this projection.

Despite prevailing pessimism in developed nations and escalating geopolitical tensions, India exhibited resilience with a 6.1% GDP expansion in the March quarter, followed by growth rates of 7.8% and 7.6% in the subsequent June and September quarters, respectively.

The cumulative growth for the first half of the fiscal year stood at an impressive 7.7%.

Expectations are high for India to sustain its growth momentum into the December quarter, solidifying its position as the world’s fastest-growing major economy, outpacing even China.

According to conservative estimates from the Organization for Economic Cooperation and Development (OECD), India is projected to achieve a growth rate of 6.3% in 2023, surpassing China’s 5.2% and Brazil’s 3%.

Looking ahead to 2024, the OECD anticipates India’s growth to remain strong at 6.1%, while China is forecasted to grow at a slightly lower rate of 4.7%.
Conversely, major economies like the US, UK, and Japan are expected to experience either a slowdown or marginal growth increases in the coming year.

India’s economic performance in 2023 stands out globally, particularly against the backdrop of the International Monetary Fund’s (IMF) projection of a global growth deceleration to 3% in 2023 and further to 2.9% in 2024.

Dharmakirti Joshi, Chief Economist at Crisil, emphasizes that geopolitical developments will continue to influence India’s domestic demand resilience in the upcoming year, forecasting a GDP growth of 6.4% for the next fiscal year.

The Reserve Bank of India (RBI) projects a growth rate of 6% for the financial year 2024-25, reflecting an optimistic outlook amid declining inflation and sustained growth. While risks such as global slowdown and geopolitical uncertainty persist, the overall economic environment appears favorable.

The RBI’s projections suggest retail inflation during the financial year 2024-25 is expected to decrease to 4.8%, down from the estimated 4.9% in the current fiscal year. With a commitment to active disinflation, the RBI has maintained the repo rate at 6.5% since February, though a rate cut may be considered in 2024 if inflation remains within the specified band of 2 to 6%.

In addressing the geopolitical landscape and global economic slowdown, India finds assurance in its robust foreign exchange reserves, which surpassed the USD 600 billion mark in December 2023, providing a cushion against external shocks.

The Last Bit, The significant influx of Japanese investments into Indian equities shows a notable shift in global investment dynamics, driven by India’s promising growth prospects and favourable market conditions.

Despite geopolitical uncertainties and economic challenges faced by major economies, India’s resilience and robust performance position it as the fastest-growing major economy, outpacing even China.

This trend not only highlights Japan’s strategic diversification of investment portfolios but also signifies India’s emergence as a preferred destination for international investors seeking high returns and stability.

As India continues to assert its economic prowess, its ongoing rivalry with China for global economic dominance intensifies, setting the stage for a dynamic and competitive landscape in the years to come.