About the economic slowdown in China and its effect on the Indian stock market – a guest post

The recent FII sell-off in global stock markets left investors and analysts scratching their heads and predicting another worldwide recession. Why? Apparently because China’s growth slowdown will seriously affect the global economy and hence, their stock markets.

The fear is overdone. Contrary to popular belief, there is no correlation between GDP growth and stock market returns. If anything, the correlation is negative. When Chinese economic growth was in double digits, its stock market was performing badly. Contrast with the Indian market, which rose to a new high even though economic growth was sliding.

In this month’s guest post, Nishit explains why the explosive economic growth in China – which was financed by ever-increasing debt – has boomeranged. The slow but steady growth in India appears more sustainable, and is receiving increased attention from overseas analysts and investors.

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Over the last few days, both on television and on the Web, I have increasingly noticed that the global investing community is highlighting India as a bright spot in a world mired in economic slowdown.

Why is that so?

The main reason is the global poster boy for economic progress, China, is slowing down. China had invested in huge capacity expansion leading to idle steel factories and other Infrastructure supporting industries.

What China did was mindlessly tried to urbanise. As long as they were building new cites and roads, the capacity was getting utilised. But urbanisation can only be done up to a point. Now, China is left with ghost cities, a property market for which there are no takers and a stock market which is just collapsing. China tried to accelerate economic growth of 50 years in a period of 10-15 years.

Now, the slow progress of India is being seen as a more sustainable way of growth.

An upside of this global attention on India is that there will be a lot of foreign funds flowing in. This will take the stock market much higher than the current levels.

Also, with global attention being focused on India, the infrastructure sector will get a boost. One can already see good infrastructure building companies showing strong performances.

Martin Armstrong, the renowned analyst, visited India in August. Visits by high profile analysts will lead to more overseas investors discovering India and attracting more funds to India.

On Bloomberg, out of 10 emerging markets, India was shown as the best placed emerging market. Of course, all this has a flip side to it. If the Government doesn’t show progress on reforms, then the overseas interest will wane quickly.

Lower commodity prices will also be a boon for India. The stock market in the next year should move up at least 20% from the current levels, based on a combination of renewed interest from foreign investors and low commodity prices.

Interesting times ahead for investors in the Indian equity market for sure.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)