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Indian stocks are trading near their most expensive levels against battered Chinese peers, underscoring a growing divergence in investor preference between the two emerging market leaders. 

The MSCI India Index trades at a 157% premium over the China gauge on valuations based on forward earnings estimates, just 3 percentage points short of the record reached in October 2022, according to data compiled by Bloomberg. 

India — long dubbed the “next China” — has emerged as an investor favorite, powered by its fast economic growth, a growing middle class and rising manufacturing prowess. Its ascent came on the back of a sluggish Chinese market, where problems ranging from rivalry with the US and deflationary pressures led to a third annual decline in the MSCI China gauge. The Indian measure has continued to advance following a fifth year of gains. 

The contrasting performance demonstrates how investors favor India, with its improving profit prospects, despite China’s extraordinarily cheap valuations. It also shows Beijing’s efforts to stem the downtrend have so far failed to make a difference. 

India is now trading at 22 times forward earnings estimates, up from a year ago, while the metric for China stands at 8.6 following a steady decline. 

India is expensive, but “can outperform EM peers in 2024,” Goldman Sachs Group Inc. strategists including Caesar Maasry and Jolene Zhong wrote in a note. In the absence of higher US real rates, “India’s strong EPS growth expectations will continue to support the elevated valuations,” they added. 

Such optimism over India and continued wariness toward China seem to be entrenched in investors’ mindset.  

Goldman analysts said in a separate report that according to hundreds of clients at the bank’s global strategy conference, there was a “clear consensus” that India is the best long-term investment opportunity while China has fallen out of favor.

That chimes with the latest Bank of America survey of fund managers, which showed India as the top emerging Asia bet, while they pared China allocations by 12 percentage points to a net 20% underweight, the lowest in more than a year.

“Chronic disappointment has turned investors away from Chinese equities, with two in five investors looking elsewhere for opportunities, given their belief that Chinese households will hold on to their savings rather than spend/invest,” BofA strategists including Ritesh Samadhiya wrote in a note.

(Adds details of surveys done by Bank of America and Goldman Sachs.)

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