From dragon to elephant — The shift in global investments

Over the past few decades, China emerged as a pivotal hub for global investors, distinguishing itself from other emerging markets through its robust economic trajectory, expansive consumer base, and strategic position in international trade networks. This investor inclination towards China was underpinned by technical factors such as superior liquidity, diverse market sectors, and a regulatory environment that, while sometimes challenging, offered substantial growth opportunities. The technical analysis of investment patterns reveals a significant concentration of foreign direct investment (FDI) and portfolio investments in China, driven by its integration into the World Trade Organisation (WTO) and the gradual liberalization of its financial markets. These technical aspects made China an attractive proposition for global capital, seeking not only returns but also a foothold in one of the world's fastest-growing economies.

However, the investment landscape began to shift due to a confluence of technical, geopolitical, and economic factors. The recalibration of global supply chains, exacerbated by the US-China trade tensions and the Covid-19 pandemic's disruptions, highlighted the vulnerabilities of over-reliance on a single market, no matter how large or dynamic. The structural headwinds facing China's economy, such as adverse demographics, deglobalisation, and debt issues in the real estate sector, are adding to the pessimism.

Technically, investors started to reassess risk exposures, leading to a diversification strategy that favoured other emerging economies with promising growth trajectories, improved governance, and strategic geopolitical positions. The technical analysis of emerging market funds and ETFs excluding China underscores this trend, showing a marked increase in allocations to countries like India, Vietnam, and Brazil. These markets presented not only alternative manufacturing hubs but also burgeoning consumer markets, underpinned by demographic trends and digital transformation, offering a compelling narrative for investment reallocation.

India's economic landscape is evolving into a magnet for global investments, driven by a youthful demographic, rapid urbanisation, and a burgeoning digital economy. For instance, capital flows show a divergence from China to India. In the U.S. exchange-traded fund market, the main fund buying Indian stocks received record inflows in Q4 of 2023, while the four largest China funds combined saw outflows of almost $800 million.

Government-led reforms, including the Goods and Services Tax (GST) and improvements in ease of doing business, have significantly enhanced India's investment climate. This, combined with a growing middle class fuelling consumer demand, sets India apart as a dynamic market with high growth potential. India's stable and transparent market conditions are attracting investors looking for reliable long-term opportunities.

Goldman Sachs strategists have endorsed India as the prime long-term investment destination, reinforcing the nation's rising prominence in the global equity market. India's stock market has recently surpassed Hong Kong, becoming the world's fourth-largest, with a valuation of $4.33 trillion. This achievement is attributed to India's expanding retail investor base, robust corporate earnings, and its positioning as an attractive alternative to China. The influx of over $21 billion in foreign investments in 2023, marking the eighth consecutive year of gains for the S&P BSE Sensex Index, underscores the growing confidence among global investors in India's market potential. Goldman Sachs has also projected that India will overtake the U.S. to become the world's second-largest economy by 2075, indicating a long-term confidence in India's economic trajectory.

Similarly, Fitch Solutions, a division of the Fitch Group, is optimistic about India's economic future in the 2020s, dubbing it "India's Decade: A Journey Towards Global Economic & Industry Leadership." The firm predicts India will be the fastest-growing large economy, with an average real GDP growth of 6.4% per year from 2023 to 2032, making it the world's third-largest economy at USD 6.8 trillion, nearly double its current size. Fitch anticipates India will shift towards a manufacturing-led economic model, supported by demographics, economic reforms, global trade diversification, and banking sector development. Additionally, Fitch Ratings has affirmed India's 'BBB-' rating with a stable outlook, highlighting a strong growth outlook and resilient finances. The Indian government's aim for fiscal consolidation, targeting a deficit of 5.8% of GDP for the fiscal year ending March 2024, further underscores this positive outlook.

• Opinion