China’s challenges and India’s rising appeal

The performance of China’s stock market and economy is a major factor in the outlook for Asian and global emerging markets. However, India is growing in importance as the world looks beyond China.

US interest rate cuts and Chinese stimuli, alongside attractive valuations supported Asian and emerging markets in 2024. But is this sustainable? The election of Donald Trump has led investors to believe that his ‘America First’ could be bad for Asia and emerging markets.

Trump wants to introduce tariffs and has indicated these could rise to as much as 60% for Chinese goods. At these levels, tariffs would have a significant impact on the Chinese economy. However, there is a potential boost from China’s stimulus package introduced by its finance ministry, which indicates a possible change in policy. 

The stimuli announced in 2024 has created an environment to encourage non-bank financial institutions to invest in Chinese equities and could limit any weakness in the domestic market. These actions may revive confidence in the economy and provide a more stable growth outlook.  

However, the structural challenges in China including the troubled property market, ageing population, rising debt and low domestic consumption continue to weigh on the economic outlook for the country. While valuations remain appealing and there is the potential for further stimuli we remain cautious on the outlook for the country’s stock market.

Indian equities have been significantly outperforming their emerging markets peers since their Covid-pandemic low in March 2020. The subsequent four-year bull market lost steam towards the end of 2024 as foreign investor sentiment waned. This was due to a combination of renewed interest in China following the introduction of its stimulus measures, and India’s slightly weaker economic data and lower corporate earnings expectations. 

As we enter 2025, concerns over the valuation premium that Indian equities currently sit on may weigh on investor’s minds. Indian equities typically trade at a premium to other emerging markets. The Indian stock market trades on a price to earnings ratio of 23 times versus it’s long-term average of 19.5 times and 12.7 for Asia¹.  

However, it has some strong long-term drivers that make it appealing. India’s demographics are favourable — it has overtaken China as the most populous country and has a young population entering the workforce. The country is not as developed as China, but infrastructure is improving rapidly and the manufacturing industry, although a small part of the economy, is benefiting from countries diversifying their operations away from China.

We are neutral across Asia and emerging markets but this position will vary from country to country. The challenges China faces are significant and while stimuli could support its stock markets in the short term, we think the structural challenges remain and these continue to weigh on our outlook for the country. 

We prefer countries such as India, as it can offer investors diversification away from China. India looks attractive as the structural position is more supportive of the economy and stock market in the long term, although valuations need monitoring.

If you have any questions about emerging markets and Asia and how you could invest in these areas in your portfolio, please contact your usual Evelyn Partners adviser, book a complimentary consultation online or call us 0207 189 2400.

1. LSEG Datastream/Evelyn Partners