Since January, China’s economic slump has led investors to turn away from investments with high exposures to Chinese economic growth, in favor of assets which can provide a hedge to China’s disappointments. India’s domestic policy developments and distant economic ties mean that Indian equities are proving to be a solid diversifier in the EM Asia region.

MSCI China and MSCI India correlation
Rolling 36-month return correlation, 2010–present

Line graph showing the MSCI China and MSCI India correlation by rolling 36-month returns, from 2010-2023

Source: Bloomberg, Principal Asset Management. Data as of July 31, 2023.

China’s economic momentum has rapidly faded. Although authorities have introduced new stimulus, it has been insufficient to stabilize growth and confidence. For investors focusing on EM Asia, this is particularly troublesome given most countries in the region have strong ties with China. India, however, has emerged as a major outlier within Asia for its minimal attachment to China’s downward pull.

China is the top trading partner for many Asian countries, and (including Hong Kong) accounts for 11% of developing Asia’s total exports. By contrast, it accounted for just 5.5% of India’s total exports in 2022, having fallen from 12.1% in 2010. More importantly for investors, while the companies included in the MSCI Asia Pacific ex-Japan Index generate 32% of their revenue from China, companies in the MSCI India Index generate only 2% from China—a clear reflection of the Indian market’s minimal exposure to China’s economic slump.

In addition, the two economies’ contrasting approach to COVID reopening illustrates their often- different domestic policies, further driving diverging economic performances. In fact, since the beginning of 2023, MSCI China has fallen -2.8%, significantly underperforming MSCI India’s 5.8% gain.1 For investors, the low correlation between the two economies means that exploring the diversification benefits between India and China can be a good source of alpha generation.

1Return data as of August 14, 2023.


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