By Monish Chhabra ǀ May 16, 2023

The graph below shows the history of stock market in India (blue) and China (orange), since the year 2000. We start them both from the equalized base of 100.

The dotted-blue line represents the long-term normalized growth of Indian stocks, while the dotted-orange shows the same for Chinese stocks. 

The solid-orange line is the best fit lower bound of the Chinese market – connecting the low points in the market history. And the solid-blue line connects the lows of Indian stock market.

First thing to note is that for most of the last two decades, these two markets were quite correlated. Not only they moved much in tandem, but also produced almost identical returns until early 2021.

That’s when they diverged like never before during this millenial. 

China dropped to the bottom of its band, first time since the early 2003. If its long-term normalized growth sustains, this is cheap.

Where China is today, India was there two years ago. It touched the bottom of its band during March-2020, the same level it last touched in early 2003. 

Since then, India has steadily recovered, running up to the mean dotted line by the third quarter of 2021, and coming off a bit since then.

What we see in the Chinese market today is ‘potential’. Provided the market gets convinced about growth to continue, and the prices start to recover. 

What we see in the Indian market today is ‘proof’. The market has already built trust in growth to continue, and the prices are well into recovery. 

India is clearer - bottomed two years ago, well into its way up now, though still below its normalized fair level, with plenty of further upside. 

China is cheaper – at a potential bottom now, needs to build conviction into recovery, with large upside if it happens.