A recent study by the London-based think tank, Official Monetary and Financial Institutions Forum (OMFIF), has brought to light a significant shift in investment preferences of global pension and sovereign wealth managers. The survey, encompassing 100 funds managing a combined $26 trillion in assets, revealed that nearly 40% of investors found India to be the most attractive emerging market, overshadowing China, which was chosen by less than a quarter of the investors.
The increasing preference for India over China among global wealth and pension funds can be attributed to a combination of factors:
- Economic and Geopolitical Concerns in China: There is a growing hesitation among funds to invest in China due to uncertainties about the country’s economic outlook and geopolitical tensions. The OMFIF study reported that none of the surveyed funds had a positive outlook for China’s economy nor expected higher relative returns from Chinese assets. Regulatory issues and geopolitical tensions were cited as major deterrents for investment in China.
- Performance of Benchmark Indices: The performance of benchmark indices also reflects this trend. China’s CSI 300 Index showed a decline of 10.4% year-to-date, whereas India’s S&P BSE Sensex Index recorded an increase of 10.33% over the same period.
- India’s Growing Attractiveness: India’s appeal for these funds is linked to its strong growth rates and favorable demographics. India is increasingly becoming open to foreign investments, as indicated by the inclusion of the country’s government bonds in JPMorgan’s bond index, scheduled for June 2024. Additionally, India and Vietnam are seen as benefiting from the diversification of global supply chains.
- Focus on Infrastructure and Emerging Markets: Funds are moving towards infrastructure investments and public equities, reducing their reliance on government bonds and real estate. This shift is aligned with India’s market, particularly its promising infrastructure sector driven by an expanding, urbanizing population and the government’s commitment to improving living standards. India’s National Infrastructure Pipeline has plans to invest over $200 billion annually in infrastructure development.
- Global Pension Funds’ Investment Strategies: The focus of global pension funds is now on inflation-proofing portfolios, mainly through infrastructure investments or “green” assets. Despite a general reluctance to boost emerging market holdings, India is identified as the most favored play in this space. This trend is also reflected in the investment strategies of large funds like the $121 billion Canadian pension fund and the $182 billion Ontario Teachers’ Pension Plan, both of which have made significant investments in India, particularly in infrastructure, solar energy, and healthcare.
- China’s Decline in Foreign Direct Investment (FDI): China recently recorded its first-ever quarterly deficit in “bricks and mortar” FDI. The direct investment liabilities, a broad measure of FDI that includes foreign companies’ retained earnings in China, were in deficit by $11.8 billion in the July-September period.
- Regulatory Crackdowns and Investment Curbs: Alongside global tensions, China has faced regulatory crackdowns and cross-border investment curbs affecting new equity listings and mergers and acquisitions. The closure of foreign consultancy and due diligence firms in China, critical to foreign investment evaluations, has also played a role in diminishing the attractiveness of the Chinese market for foreign investors.
In conclusion, the shift in investment preferences from China to India among global wealth and pension funds is influenced by a combination of economic, geopolitical, and market performance factors. India’s emerging market appeal, strong growth prospects, and favorable investment climate, in contrast to China’s economic uncertainties and regulatory challenges, have made it a more attractive destination for these funds.