"Sell India, Buy China"! The "Tariff War" reverses the narrative of the Chinese and Indian stock markets

Trump's tariff stick aimed at India is rewriting the investment landscape in Asia, with "Sell India, Buy China" overturning mainstream market views.

Since this quarter, the India MSCI index has lagged behind the Chinese stock market by about 10 percentage points and may record the largest annual performance gap since 2017.

According to CCTV News, on Wednesday, August 6, local time, Trump signed an executive order imposing an additional 25% tariff on goods from India in response to India's continued "direct or indirect imports of Russian oil." This brings the total tariffs faced by Indian exports to 50%. This targeted tariff has triggered foreign capital to withdraw from the Indian market, with approximately $3 billion flowing out just last month, marking the largest single-month outflow since February of this year.

Meanwhile, Wall Street has also begun to adjust its investment strategy. Goldman Sachs maintains a "market weight" view on the Indian stock market, while reiterating an "overweight" stance on the Chinese stock market and raising the 12-month target for the MSCI China index. This shift in market dynamics highlights the volatile environment investors are facing, with the market capitalization gap between Chinese and Indian stock markets expanding to $6.3 trillion, the largest since March.

Trade Disputes Reshape China-India Investment Landscape

Trump's tariff strike against India came particularly suddenly and specifically. According to a previous article by Wall Street Insight, Trump wrote in the executive order: "I have determined that the Indian government is directly or indirectly importing oil from Russia." He also instructed U.S. government officials to identify whether other countries are directly or indirectly importing Russian oil and to determine whether and to what extent actions should be taken against those countries.

"India has always been an ally of the United States, and this escalation of trade tensions and the backlash against Russian oil is really affecting market sentiment," said Anna Wu, cross-asset strategist at Sydney-based investment management firm VanEck.

She expects that in the coming quarters, Chinese stocks will outperform their Indian counterparts.

This differentiated treatment has raised concerns among investors, who were already cautious about India's high valuations and slowing profit growth. According to Bloomberg data, foreign investors withdrew approximately $3 billion from the Indian stock market last month, the highest level since February of this year.

Chinese Stock Market Regains Investment Enthusiasm

Benefiting from the easing of trade tensions and "anti-involution" policies, the Chinese stock market has regained momentum this year, enhancing its investment attractiveness relative to the Indian stock market.

The MSCI India index is currently trading at over 21 times its one-year forward earnings, while the Chinese index is at 11.9 times, prompting value investors to refocus on the more attractive entry points offered by the Chinese market.

"Before the shadow of this trade uncertainty is lifted, Indian stocks may be in a secondary position in regional allocations," said Chetan Seth, equity strategist for Nomura Holdings in the Asia-Pacific region. "Foreign funds may have more selling to do."

Trade Conflicts May Undermine India's Manufacturing Ambitions

The rapid deterioration of US-India relations and new tariffs may undermine the key goal of "Make in India."

"Trump's doubling down on this latest escalation may further exacerbate the growing outrage among Indians over feeling bullied," said Andrei Stetsenko, a partner at New York investment firm Farley Capital LP.

These trade disputes will only heighten investors' unease about India's high valuations.

In contrast, China offers investment opportunities in booming sectors such as artificial intelligence, clean energy, and biotechnology at more attractive prices, which may continue to support the "buy China" investment logic prevailing in the short term.

Despite facing challenges in the short term, India's long-term economic trajectory remains attractive to some investors. According to Morgan Stanley's forecasts, as India gains a share of global output over the coming decades, the Indian stock market is expected to reach new highs, supported by robust fundamentals such as strong population growth and continuously improving infrastructure.

Risk Warning and Disclaimer

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