Trump tariffs threaten to widen $6.3 trillion gap between China and India markets

India’s bid to close the gap with China’s stock market could be slipping further out of reach, thanks to the US President Donald Trump’s latest tariff escalation. India’s equity market now trails onshore China’s by $6.3 trillion, the widest gap since March, as per Bloomberg. The MSCI India Index has reportedly underperformed its Chinese counterpart by 10 percentage points this quarter and is heading for its biggest annual lag since 2017.

Tariffs hit India harder

President Trump announced a 50 per cent tariff on Indian exports to the US, half of which is effectively a penalty for India’s purchases of Russian oil. While New Delhi was singled out, China, which imports far more from Moscow has largely been spared. Beijing, according to Bloomberg, is instead waiting for an extension of its trade truce with Washington.This selective targeting has reportedly shaken investor sentiment towards India, already under pressure from high stock valuations and slowing earnings growth. Last month alone, foreign investors pulled about $3 billion from Indian equities, the biggest monthly outflow since February, as per Bloomberg data.

Despite the near-term challenges, India’s growth prospects remain appealing. Morgan Stanley, as per Bloomberg, still sees Indian equities climbing to new highs over the coming decades, driven by population growth and infrastructure development. Veteran emerging-market investor Mark Mobius told Bloomberg TV that any market correction could be a buying opportunity, with the US tariff battle likely to have only a “short-lived” psychological effect. Domestic institutional investors have also stepped in, pouring about $50 billion into Indian equities, according to exchange data compiled by Bloomberg. Along with retail investors, they now control a bigger slice of the $5.2 trillion market than foreign funds, which could help cushion against sharp selloffs.

Wall Street tilts toward China

Global investment houses are taking note. Goldman Sachs, as quoted by Bloomberg, has maintained a “marketweight” stance on Indian equities while upgrading its 12-month target for Chinese stocks and keeping an “overweight” view on them.

The reversal is striking. Just a few years ago, China was labelled “uninvestable” due to regulatory crackdowns and geopolitical risks, leading many funds to pivot towards India as a safer bet. Now, India faces its own set of headwinds: trade friction with the US, softer corporate earnings, and expensive valuations. Anna Wu, a cross-asset strategist at VanEck in Sydney, told Bloomberg that China’s shares are likely to outperform Indian peers in the coming quarters. She cited easing trade tensions in Beijing, government “anti-involution” policies, and advances in artificial intelligence, such as the DeepSeek breakthrough earlier this year, as factors supporting Chinese markets.

Meanwhile, Beijing is not without its own troubles. UBS has delayed its forecast for a property market recovery after second-quarter sales weakened. While GDP growth exceeded expectations, deflation risks and sluggish consumer spending remain concerns. Yet for global investors, China’s market still offers access to high-growth sectors such as AI, clean energy, and biotech at more attractive price levels. Bloomberg notes that the MSCI India gauge trades at over 21 times its one-year forward earnings, compared to just 11.9 times for China’s equivalent index.

Trade rift could impact India’s manufacturing ambitions

The tariff escalation also threatens Prime Minister Narendra Modi’s goal of positioning India as a manufacturing alternative to China. As quoted by Bloomberg, Andrei Stetsenko of Farley Capital LP warned that Trump’s pressure campaign risks deepening Indian resentment, potentially damaging what had been a strengthening US-India partnership built on shared concerns over China.

Until trade tensions ease, analysts like Nomura’s Chetan Seth expect Indian equities to remain sidelined in regional portfolios, with more foreign fund selling possible in the months ahead.

(With input from the agencies)