India beats China (in stock performance)

Strong profit growth, geopolitical tailwinds and favorable demographics have presented a compelling investment case for the country. From the end of 2019 through Tuesday, the MSCI India Index surged 110%, ahead of the U.S. tech-heavy index’s 99% gain. Even more surprising, though, is how well India has fared compared with what is—for now, at least—the world’s largest emerging stock market: MSCI China is down by 30% over the same period.

The contrasting fortunes of the two Asian markets mirror their economic realities. China’s imploding housing market continues to be a drag on its economy while a regulatory crackdown has sunk the country’s once-highflying tech companies. Chinese e-commerce giant Alibaba, for example, has lost around three-quarters of its value since its peak in 2020.

India’s market, on the other hand, is riding powerful economic tailwinds. Its economy grew by 7.8% year over year in the first quarter—the fastest among major economies. That has fed through to corporate earnings: Net profit for listed Indian companies grew 17% year over year for the quarter ended in March, according to Morgan Stanley. Developed countries’ drive to diversify their supply chains away from China has led to an investment boom in manufacturing. Its young population—India’s median age is 28.6, compared with China’s 39.5—also makes it more appealing.

But differing growth rates only explain part of the discrepancy in stock performance: Higher multiples also are driving the rally, and those are prone to overshoot or undershoot. The iShares MSCI India exchange-traded fund fetches 23 times forward earnings, rising from 19 times at the beginning of 2020, according to FactSet. A similar fund tracking Chinese stocks has dropped from 12 times to below 10 times.

The other large global stock market with a similar price tag to India’s is the U.S., led by AI darlings such as Nvidia. China, by contrast, is near the bottom of the league table, sporting a multiple similar to that of slow-growing, heavily indebted Italy. Indian stocks trade at around a 60% premium to other markets in the Asia-Pacific region, excluding Japan, according to Goldman Sachs, compared with an average of 50% over the past five years.

Foreign investors have been net sellers of Indian stocks this year after $21 billion of inflows in 2023, but much of that came after May when the Indian election outcome was hanging in the balance. The MSCI India Index fell 6% on June 4 after early polls indicated that Prime Minister Narendra Modi, an economic reformer and a favorite of Western investors, might not secure the parliamentary majority the market was hoping for. The market has since rebounded as Modi’s party managed to stay in power together with its allies. Foreign investors started tiptoeing back into the market in the past week.

India is increasingly a market that global investors can’t ignore. In the rebalancing effective at the end of last month, MSCI increased India’s weighting while cutting that of China in its benchmark emerging markets index. India now makes up around 18%, up from just 8% in 2020, while China’s weighting has declined to 27% from 40%, according to Northern Trust.

India has long been billed as the “next China," yet it has had many false starts. With a larger, younger population and a reformist wind at its back, India’s stark valuation gap with the onetime emerging-market darling might not keep widening, but it certainly seems justified.

Write to Jacky Wong at jacky.wong@wsj.com