Asia Tea Time - Cup 71 ☕

September 22, 2024 • Estimated Reading Time: 5 minutes

This week I talk India overtaking China in a key global benchmark and what we should be considering with our cash now that interest rates are starting to fall. 

Macro in Asia

India overtakes China in MSCI All-Country World Index weighting

India has surpassed China for the first time ever in a key global stock market index, the “investable” MSCI All-Country World Index (ACWI).

It tracks all global stocks and India’s weight of the free-float, investable index hit 2.35% this month versus China’s 2.24%. 

Why it’s happening

  • China’s stock markets have been pretty downbeat, not too dissimilar from the Chinese economy itself. 

  • Meanwhile, India’s stocks have been on an extended run of gains. So far in 2024, India’s Sensex Index is up 15% while China’s Shanghai Composite Index is down around 9%. 

Why it matters

  • China has always been the “king” of Global Emerging Markets (GEMs). Indeed, in 2020, China made up close to 40% of the MSCI Emerging Markets Index. That has now dropped to 24.4% (as of the end of last month).

  • With India overtaking China in one of the big global benchmarks, it’s only a matter of time before it starts to be bigger in emerging market indices as well. 

What’s next?

  • Watch out for the moves in both the Indian and Chinese stock markets for the rest of the year. One is always labelled as expensive (India) while the other is seen as dirt cheap (China).

Tim’s Take 

  • This landmark for India’s stock markets are more like official recognition for what everyone know has been happening for a while – Indian outperformance versus China’s stocks.

  • Whether this big gap in performance is structural (semi-permanent) or cyclical (temporary) is always up for debate but the outperformance over the past three, five and 10 years is undeniable. 

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That’s because the data highlight just how strong India’s markets have been. Take the MSCI India, which has 146 large and mid-cap stocks in the Indian stock market. Over the past three years, it has provided an annualised return of 11.1%. 

Over the past five years, it’s an even more impressive 16.7% annualised and over 10 years it’s 9.6% annualised – towards the high end of what you can expect from being invested in global stocks.

Meanwhile, the MSCI China looks to be the mirror opposite of its Indian equivalent. Its annuslised return over three years is -13.4% (yes, negative), while it delivered -3.2% annualised over five years, and just 0.72% annualised over the past decade.

For most investors looking at China over the past decade, they would have been better off just being in cash or Treasuries, or global stocks. The MSCI ACWI has delivered a 10-year annualised return of 9.3%, pretty much in line with what Indian stocks have delivered.

That’s not been any surprise with the slowing Chinese economy versus the consistently fast-growing Indian economy and how India is benefitting from the capital and investment shift away from China. 

Regardless of whether there’s a case for how expensive India’s stocks are right now, or if you believe China is unreasonably cheap, it seems that the momentum – and broader narrative – are in India’s favour. 

Tim’s money tip of the week

Remember when everyone was saying “cash is trash” amid a massive run-up in stock markets during the Covid-19 pandemic? Well, that soundbite quickly dissipated from the discussion as interest rates rose in a fast and furious fashion starting in early 2022.

But now that the Federal Reserve in the US has started to cut interest rates, is it automatically back to the old thinking? Not necessarily. While the first move was a 50 basis point (0.5%) reduction in the Fed Funds rate, which was a slight surprise, it doesn’t mean interest rates are coming down as fast as they went up. 

So, what do we do with our cash? We should expect yields on safe investments, like US Treasuries, Singapore T-bills, and Singapore Savings Bonds (SSBs) to continue to come down. However, that doesn’t mean all cash rates are going to be terrible. Keeping our emergency fund in these type of safe investments to get a yield is a given.

But for cash beyond that, and that we don’t need in the foreseeable future, we should be looking at other options, particularly bonds. That’s because as interest rates fall, bond prices tend to rise. Additionally, if there is a recession (which isn’t certain but is definitely a possibility), then we can expect bonds to outperform stocks.

Of course, diversifying among both stocks and bonds, as well as perhaps real estate (in the form of REITs) are all options we can consider with the cuts in interest rates having officially kicked off.