India Overtakes Hong Kong As World's Fourth-Largest Stock Market

India's stock market has overtaken Hong Kong's for the first time in another feat for the South Asian nation whose growth prospects and policy reforms have made it an investor darling.

The combined value of shares listed on Indian exchanges reached $4.33 trillion as of Monday's close, versus $4.29 trillion for Hong Kong, according to data compiled by Bloomberg. That makes India the fourth-biggest equity market globally. Its stock market capitalization crossed $4 trillion for the first time on December 5, with about half of that coming in the past four years.

Equities in India have been booming, thanks to a rapidly growing retail investor base and strong corporate earnings. The world's most populous country has positioned itself as an alternative to China, attracting fresh capital from global investors and companies alike, thanks to its stable political setup and a consumption-driven economy that remains among the fastest-growing of major nations.

"India has all the right ingredients in place to set the growth momentum further," said Ashish Gupta, chief investment officer at Axis Mutual Fund in Mumbai.

The relentless rally in Indian stocks has coincided with a historic slump in Hong Kong, where some of China's most influential and innovative firms are listed. Beijing's stringent anti-Covid-19 curbs, regulatory crackdowns on corporations, a property-sector crisis and geopolitical tensions with the West have all combined to erode China's appeal as the world's growth engine.

They have also triggered an equities rout that's now reaching epic proportions, with the total market value of Chinese and Hong Kong stocks having tumbled by more than $6 trillion since their peaks in 2021. New listings have dried up in Hong Kong, with the Asian financial hub losing its status as one of the world's busiest venues for initial public offerings.

However, some strategists expect a turnaround. UBS Group AG sees Chinese stocks outperforming Indian peers in 2024 as battered valuations in the former suggest significant upside potential once sentiment turns, while the latter is at "fairly extreme levels," according to a November report. Bernstein expects the Chinese market to recover, and recommends taking profits on Indian stocks, which it sees as expensive, according to a note earlier this month.

That said, momentum seems to be on India's side for now.

Pessimism toward China and Hong Kong has further deepened in the new year amid a lack of major economic stimulus measures. The Hang Seng China Enterprises Index, a gauge of Chinese shares listed in Hong Kong, is already down about 13% after capping a record four-year losing streak in 2023. The measure is hurtling toward its lowest level in almost two decades, while India's stock benchmarks are trading near record-high levels.

Foreigners who until recently were enamored with the China narrative are sending their funds over to its South Asian rival. Global pension and sovereign wealth managers are also seen favoring India, according to a recent study by London-based think-tank Official Monetary and Financial Institutions Forum.

Overseas funds poured more than $21 billion into Indian shares in 2023, helping the country's benchmark S&P BSE Sensex Index cap an eighth consecutive year of gains.

"There is a clear consensus that India is the best long-term investment opportunity," Goldman Sachs Group Inc. strategists including Guillaume Jaisson and Peter Oppenheimer wrote in a note Jan. 16 with results of a survey from the firm's Global Strategy Conference.

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