Signs indicate that a significant amount of smart money globally is withdrawing from the Indian and Vietnamese markets, which were previously severely overvalued and once dubbed by Western journalists as the "Asian economic miracle." Instead, this capital is accelerating its flow into the Chinese capital market, which has been mistakenly undervalued in recent years. Taking India as an example, the escalation of the Israel-Iran conflict and the intensification of geopolitical risks in the Middle East have led to a significant increase in oil prices and foreign investors selling off Indian assets. As a result, the Indian rupee is approaching an all-time low against the US dollar. As of the publication date of October 4th, 1 US dollar is nearing the high of 84.00 Indian rupees.

According to data from the Bombay Stock Exchange in India, foreign investors sold off more than $3 billion (approximately 252 billion rupees) in the three trading days ending on October 3rd. Reuters analysis suggests that international oil price risks, Indian currency tightening, suppressed stock derivative transactions, and China's economic stimulus measures have all prompted foreign investors to leave India and turn to the Chinese capital market, which was previously undervalued but has a continuously improving outlook.

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Analyst Edward Chancellor stated on October 4th that investors made two significant mistakes when investing in emerging markets. First, they were attracted by GDP growth, despite no evidence indicating a positive correlation between economic expansion and stock market returns. Second, they believed that valuations were a reliable predictor of returns. Since the 2008 financial crisis, the strong performance of the Indian stock market relative to the Chinese stock market has shown how mistaken this approach is.

The term "emerging" itself implies that underdeveloped economies with strong growth prospects are expected to bring substantial investment returns. Let's examine the results. Over the past 15 years, both the Chinese and Indian economies have achieved rapid growth. In constant US dollars, China's GDP is about 2% higher than India's each year. In September 2009, the price-to-earnings ratio of the MSCI China Index was 25% lower than that of the MSCI India Index. Since 2014, the annual total return of the Chinese stock market, calculated in US dollars, has been only 2.5%. The annual compound growth rate of the Indian stock market is four times this figure. This sets the stage for a significant amount of global capital to withdraw from markets with severe bubble risks like India today and flow into the Chinese market to bottom-fish.

There is a relatively simple explanation for this difference. At the end of 2008, China launched a massive stimulus plan to counter the global financial crisis. It used its vast domestic savings to fund an extraordinary investment boom. The total amount of domestic fixed assets (mainly real estate) as a percentage of GDP soared from 38% to 44% and has remained high. The investment boom was accompanied by rapid credit growth and supported by loose monetary policy. In contrast, India's savings and fixed asset investments are relatively lower. From 2009 to 2020, this investment as a percentage of GDP decreased from 34% to 27%. India's average interest rates are twice those of China.

Economic theory posits that capital returns should ultimately equal their cost. Indeed, China's low capital costs have brought lower returns in this process. Capital has been massively misallocated, and the long-standing overcapacity in the entire economy is evidence of this. Since 2020, when some highly indebted real estate companies gradually fell into difficulty, debt deflation has become apparent. India, on the other hand, did not experience a real estate, credit, or investment boom and thus avoided the subsequent aftereffects. Its relatively higher capital costs have produced relatively higher investment returns. However, this has further fostered the inflation of Indian asset bubbles. With the Chinese market increasing its broad monetary supply, India will experience capital withdrawal around this time.

From 2014 to 2023, the return on equity (ROE) of Indian companies remained stable within the range of 10% to 13%, while the average ROE of Chinese companies decreased from 10% to 6% during the same period. Data from CLSA shows that since 2014, the total number of stocks in the MSCI China Index has increased by 2.5 times. However, earnings per share have hardly changed. Investors have taken note of this. The valuation of China's benchmark index has dropped from more than 2.5 times book value in 2020 to 1.3 times earlier this year. Meanwhile, the price-to-book ratio of the MSCI India Index has averaged more than 3 times over the past decade and has now risen to 4.5 times. This again indicates that if macro monetary policy is broadly and continuously supported, Chinese assets have a more reasonable upward potential compared to Indian assets.

Alex Duffy, an emerging markets expert at Marathon Asset Management, believes that India's capital market is currently beginning to collapse. Since 2022, private investment funds in Indian banks and other financial institutions have almost doubled. Driven by retail investors, the valuation of Indian mid-cap stocks has been pushed up to 35 times expected earnings, 70% higher than the long-term average, but there has been no significant improvement in growth rates or potential profitability. Therefore, the risk of Indian asset prices being reset will become apparent as more competitive market easing measures are clearly introduced. This will lead to the withdrawal of related funds from the Indian market and their flow into China.

In addition, while speculative recession signs have appeared in the Indian stock market this year, China's capital cycle is approaching its low point. Data shows that before the strong rebound in asset prices in this round, private market financing decreased by 98% compared to before the pandemic. Securities regulatory agencies have instructed listed companies to increase distributions to shareholders. Stock buybacks currently account for nearly 40% of total dividends. CLSA states that with the increase in stock buybacks, the number of outstanding shares has begun to decline. In principle, a decrease in the number of shares should promote the growth of earnings per share. This is also one of the technical reasons for the recent explosive rise in Chinese assets.

Reuters reports that since the announcement of a new round of stimulus plans last week, the Chinese stock market has been surging. Analysis suggests that a series of loose monetary measures still have a long cycle and space, during which some companies will repurchase more shares through financing. Currently, Chinese stocks may still appear cheap based on various valuation indicators. However, some analysts believe that emerging market investors should remain vigilant and respectful of the market until there is clear evidence of supply-side contraction.Additionally, the BSE Sensex 30 index in Mumbai, India, has risen from 5,375.11 points on January 3, 2000, to 81,688.45 points at the time of publication on October 4, 2024, an increase of 14.2 times. In the two years following the pandemic, the BSE Sensex 30 index has seen a significant increase among the world's major stock indices, with full-year gains of 15.60% in 2020 and 21.69% in 2021.

A report by JPMorgan shows that over the past three years up to the first quarter of this year, the Indian stock market has surged by 46%, higher than the global stock market's 20% increase, while emerging market stocks have fallen by 13%. Only the United States has been able to match this performance during the same period. As can be seen from the index changes in the past, China's capital market has been severely underestimated by the market, while markets like India and the United States face a significant risk of bubble burst.

Not only that, but India's much-criticized business environment has also led to the country's erratic treatment of foreign and domestic investments, with frequent changes and weak infrastructure and health facilities, often leading to various absurd "stories"... This has caused some of the world's manufacturing giants to continuously rethink whether it is necessary to continue setting up factories in India.

For example, the frequent occurrence of "deadbeat" phenomena in India has cast a shadow over the country's economic credit, and India has been listed as one of the most difficult countries to do business in by the World Bank's reports for several consecutive years. In recent years, international capital or companies have filed the most international arbitration cases against India's economic credit issues, including well-known international companies such as Deutsche Telekom, Vodafone Group of the Netherlands, Russian power operator Sistema, TCI Cyprus Group, and Nissan of Japan. They have all filed arbitration against India for a series of issues, including retroactive taxes and payment disputes.

A netizen doing business in India once said on social media: "Indians do business, to describe it with an idiom: 'Greedy and Ungrateful!'" In fact, since 2014, "Modi Economics" has made India's economic planning dual-sided, one side "attracting investment," and the other side preventing problems before they occur. It leaves enough room for the local market and also spares no effort to protect and support local enterprises, stifling the growth of international capital in India. This has led to international enterprises and capital groups in India accelerating their withdrawal from India due to their inability to adapt to India's economic environment.

So far, several international corporate giants such as Tesla, Foxconn, Samsung, Ford, and Disney have withdrawn part of their investments or planned to withdraw from India, and a considerable number of these companies have gradually returned to China for most of their production. Data shows that last year alone, nearly 3,000 foreign enterprises left India in various ways, or directly announced bankruptcy in India.

International media such as the Financial Times of the UK and the US Consumer and Business Channel, as well as analysts from investment banks such as Morgan Stanley, have questioned that although "Made in India" sounds impressive, it seems like a "mirage." "When the mainstream of global manufacturing is moving towards iteration driven by newer productivity and more refined high-quality productivity, a large part of the production in India and Vietnam, which still relies on contract manufacturing and simple assembly lines, simply cannot become a true world factory. Because their productivity does not meet the new demands of the world economy, the soft power of India and Vietnam is obviously overestimated, leading to a more severe bubble in the related capital market. This will also accelerate the process of a large amount of capital withdrawing from India and Vietnam.

It is worth noting that data shows that as of the third quarter of this year, including the debt of various states, India's public debt has reached about 1.5 trillion US dollars. However, India's foreign exchange reserves during the same period are 704.89 billion US dollars. Although the foreign reserves have reached a historical high, the total public debt has reached 212% of the foreign exchange reserves. This indicates that India's economy is seriously in deficit, and its growth in previous years has been achieved by being deeply trapped in a huge dollar debt black hole. This provides the Federal Reserve and Wall Street capital giants with a broad space to harvest in India by using different currency cycles of the dollar.

For example, Jim Rogers, a billionaire and one of the most far-sighted Wall Street capital sharks, has warned more than once that India often makes mistakes and they simply do not understand economics. Rogers has repeatedly issued calls to short and bet against the Indian economy, stating that he has not invested in India after 2014. Since 2023, the well-known Wall Street short-selling institution Hindenburg Research has repeatedly issued reports that the market value of Adani Group, owned by India's top tycoon Gautam Adani, is seriously overestimated, leading to a significant drop in the company's stock price and revealing the scars of the Indian economy.

Moody's earlier downgraded India's rating to negative, which also indicates that India's ability to attract global funds is weakening. Based on comprehensive analysis from sources such as The Economist in the UK, the Indian economy is currently in the most urgent situation of this century and may regress to the level around the year 2000, or it may regress by 24 years.Additionally, based on reports analyzing and predicting that the total market value of the Indian stock market, which is around $5 trillion, has seen a cumulative increase of over 40% in the past three years, making Indian stocks exorbitantly expensive, in the new monetary cycle of the Federal Reserve, a new round of harvesting mode may be initiated for vulnerable markets with high external debt and low foreign reserves, such as India and Vietnam. Meanwhile, as global funds are pouring into the world's second-largest economy, China, accelerating the siphon effect on Chinese assets, some analysts believe that the Indian capital market may see an evaporation of at least $2 trillion (approximately 168 trillion Indian Rupees) in funds.

The market carries risks, and investment should be approached with caution. This article does not constitute investment advice, and any actions taken based on it are at one's own risk.