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HONG KONG — As Chinese equities hover near a bear market, neighboring India is scaling new highs despite having a bigger fight in hand with the coronavirus pandemic.

The contrast in fortunes of the largest and fourth-largest stock markets in the region has offered foreign investors an opportunity to rotate their capital, as a regulatory crackdown on big technology companies has wiped out over $1 trillion from mainland Chinese stocks.

But as Indian equity valuations soar and bargains begin to emerge in China, investors are now wondering if a reversal is in the cards.

Over the past five years, the main share indexes of the two nations have often moved in opposite directions. Among major equities markets in the region, India has among the lowest correlation to China. Its main share index is dominated by companies that either cater to domestic consumers or operate in export sectors such as software, well away from China’s areas of strength. Other markets in the region, such as Taiwan and South Korea, are closely linked to China.

Refinitiv data shows a correlation between India’s Sensex and China’s CSI 300 Index of just 0.04 based on an average of the last 90 days, versus 0.16 for Taiwan’s benchmark and 0.25 for South Korea’s Kospi. A correlation near zero suggests close to no link at all, while a correlation of 1 would show two markets moving in lockstep.

“India and Chinese stock markets have their own rhythm,” said Herald van der Linde, Asia equity strategist at HSBC in Hong Kong. “While, say, the Korean market has lots of companies exposed to China and the U.S., India has many fewer companies that have this exposure. Investors can make use of this dynamic and if they want to sell Chinese stocks, they can invest it into India.”

Inflows into China through the stock connect scheme, which links Hong Kong with mainland exchanges and accounts for about 70% of foreign portfolio flows, slumped in June and July after a record start to the year when the inclusion of Chinese stocks in global benchmarks drove buying activity.

The Indian market, meanwhile, is now the biggest recipient of foreign money in the region outside of China for the year to date. By contrast, foreign investor selling in markets including South Korea and Taiwan has taken the total outflow from emerging Asia to $42.8 billion as of Aug. 31, according to Goldman Sachs.

India’s benchmark share index is the top gainer among the largest country indexes globally this year, driven by financials, utilities, industrials and consumer discretionary stocks. Investors are shrugging off what still amount to tens of thousands of new coronavirus cases every day across the country, betting the government and central bank will keep the stimulus flowing to aid the economy and push through reforms.

Foreign buyers are also drawing comfort from the support that first-time investors are providing to the market as returns on bank deposits and other savings decline. The number of retail investor accounts surged nearly 35% in the financial year ended March to reach 55 million, according to the market regulator.

This, combined with a deep market that can easily absorb the liquidity flow from China and rest of Asia, makes Asia’s third largest economy a compelling investment destination, analysts and foreign investors said.

So far this year, Indian shares have absorbed $7.2 billion of inflows, putting the nation on course to notch three consecutive years of net foreign buying. Foreign funds deployed $37.6 billion over 2019 and 2020 in the country’s equity market, according to Goldman Sachs’ weekly fund flow monitor.

While China’s blue-chip CSI 300 Index, which tracks the largest shares traded in Shanghai and Shenzhen, has slumped 17% from its February peak, India’s benchmark S&P/BSE Sensex has gained a fifth since its recent low in late February and set another record on Friday.

Now the Indian benchmark trades at a record 30 times trailing earnings, compared with a 10-year average of 21 times, prompting investors and analysts to sound a note of caution. The premium Indian stocks command over their Chinese counterparts is also at the highest in at least five years.

“Chinese stocks have gotten riskier with all the challenges and as a result Indian equity should look attractive,” but expensive valuations mean any flow away from China might go toward developed markets instead, said Sunil Tirumalai, India strategist at UBS Global Research. While the Indian equity market is a “good place” to be over the long term, he said, the current run-up has happened too fast and “there should be some element of cooling off.”

There has been some evidence of the pendulum swinging back to China. In the week ended Aug. 24, Indian equities had outflows of $100 million, according to Goldman Sachs.

A decline in Chinese stocks is still the biggest bet among global fund managers, who also consider emerging market risk — largely from China — as the biggest threat to financial market stability, according to a survey by Bank of America published last month.

But more than a month of intense selling crushed the price/earnings ratio on the CSI 300 to 16 times forward 12 month earnings, well below the February peak of almost 19 times, prompting fund managers to cherry-pick stocks. In the later part of August, the market staged a comeback on the back of strong earnings from online retailer JD.com. Ray Dalio, co-chief investment officer of hedge fund Bridgewater Associates, said Chinese stocks should be considered an “important” part of a portfolio.

BlackRock’s research unit is advising clients to treat China as a destination separate from emerging markets  and recommends increasing allocation to the nation.

Foreign inflows via the stock connect scheme also picked up in August, to more than double the total for July, according to the Hong Kong Stock Exchange

Intriguingly, for those trying to divine what comes next, there is a clear divergence in investor bets when it comes to India and China, according to strategists at Societe Generale.

Chinese markets are pricing in a weaker U.S. dollar, while investors plowing cash into India hold the opposite view. Chinese investors have a higher expectation for U.S. inflation than their Indian counterparts, SocGen concluded based on investor positioning in the two markets.

“Whether these divergences have been, or will continue to be, responsible for the performance divergence, only time will tell,” SocGen strategist Puneet Singh and colleagues wrote in a note to clients on Aug. 23. “What is interesting is the divergence itself, as it gives investors an opportunity to choose between the two markets.”