The Decoupling
In 2021–2023, India and China equity markets had a correlation coefficient of 0.61 — meaning they moved broadly together in response to shared EM risk factors. By 2026, this correlation has fallen to 0.22, one of the lowest readings on record.
Why the Divergence
China's economic challenges (property sector stress, deflationary pressure, regulatory uncertainty) have driven sustained underperformance. Meanwhile, India's growth trajectory, corporate earnings, and governance improvements have attracted a distinctly different investor base. Some global EM funds have explicitly increased India allocation as a "China alternative."
The Risk to Watch
If China meaningfully recovers — driven by stimulus or property stabilisation — global EM funds may rotate from India to China in search of a catch-up trade. This doesn't invalidate India's long-term story, but short-term FII outflows from such a rotation could compress Indian market multiples temporarily. It's a risk worth monitoring, not acting on preemptively.