CLSA hikes India allocation to 20% overweight on foreign inflow bets, reverses China call post-Trump win
- CLSA noted that the Chinese market and economy will face fresh challenges after Republican Donald Trump's landslide victory in the 2024 US Presidential Elections, while India is least exposed to Trump's adverse trade policies.
Global brokerage firm CLSA increased its India allocation to 20 per cent overweight on Friday, November 15, while slashing its exposure to China in a tactical reversal, over potential foreign fund inflows waiting to enter Indian markets in the near term. This comes even as the Indian stock market has entered a correction phase amid sustained foreign capital outflows, weak earnings, domestic inflationary pressures, and high valuations.
In its global equity strategy report, ‘Pouncing Tiger, Prevaricating Dragon,’ the Hong Kong-based brokerage explained that the Chinese market and economy will face fresh challenges in the aftermath of Republican Donald Trump's landslide victory in the 2024 US Presidential Elections.
"Misfortune can happen in threes. So, it has played out for Chinese equities over the past week. Trump 2.0 heralds a trade war escalation just as exports become the largest contributor to China's growth," said the brokerage. CLSA has now returned to a ‘benchmark’ allocation for China, citing potential investor hesitation after offshore funds raised their exposure in September.
Over the duration, both MSCI China and India have corrected by 10 per cent in US dollar terms, so CLSA did not lose money by making the switch. Earlier, it had reduced its Indian overweight to 10 per cent from 20 per cent and raised China's allocation to a five per cent overweight from the benchmark. "We now reverse that trade," CLSA clarified in its note on Friday.
India least exposed to Trump's adverse trade policy: CLSA
CLSA said several global investors it engaged with have been waiting for a market correction in India to address their underexposure to Indian equities. "Paradoxically, India has seen strong net foreign investor selling since October, while investors we met this year have been waiting specifically for such a buying opportunity to address Indian underexposure," said the brokerage.
By contrast, India appears to be among the least exposed regional markets to Trump’s adverse trade policy. Moreover, so long as energy prices remain stable, India may offer a relative oasis of FX stability in an era of a strengthening US dollar. According to CLSA, domestic appetite remains strong, offsetting foreign jitters, and valuation, though pricey, is now a little more palatable.
In October 2023, CLSA upgraded India from 40 per cent underweight to 20 per cent overweight, citing a favourable credit environment, lower energy costs due to discounted Russian crude, and strong growth prospects. However, a year later, CLSA adjusted its strategy, reducing India's overweight to 10 per cent while adding China amid what appeared to be early signs of a market recovery in the dragon nation. That position has now been changed.
"The chief risk to Indian equities is a frenzy of issuance swamping the secondary market-- cumulative 12-month issuance is 1.5 per cent of market cap, a historical tipping point," added the brokerage. The market cap is close to the same level at which it peaked in the last four cycles in Indian issuance, coinciding closely with secondary market momentum peaks.
India, it said, remains sensitive to energy prices (86 per cent of the country's oil consumption is imported, 49 per cent of natural gas, and 35 per cent of its coal needs). "We remain concerned about the potential for risk premium in the oil price or at worst, a substantive supply interruption from Iran-Israel tensions."
Importantly, “the Reserve Bank of India (RBI) has accumulated a veritable war chest of foreign exchange (FX) reserves (some $700 billion worth), which it actively deploys for FX intervention in defence of the rupee," it said.
"India is one of the few emerging markets where a relationship between corporate earnings growth and the changes in the pace of economic output holds true, attributable to the country's more domestically oriented equity market," it said. Stating that the strong domestic retail appetite offsets foreign jitters, CLSA added that Indian equities are 83 per cent domestically owned, the highest proportion across emerging markets.
According to the brokerage, given the high domestic equity ownership, there is an especially faithful association between Indian mutual fund flows and Nifty 50 index momentum. CLSA also added that the momentum has softened on corporate earnings, yet the outlook remains robust.
China to face further economic headwinds with Trump 2.0
CLSA asserted, “In the light of recent developments, we no longer have sufficient conviction to maintain an above benchmark exposure on Chinese equities heading into 2025.” According to the brokerage, Trump 2.0 promises to be especially challenging for China.
Even if, for fear of stoking US inflation, Trump’s administration does not apply the full 60 per cent threatened tariff schedule to Chinese imports, any escalation in the trade war would likely prove disruptive for Chinese equity assets and the renminbi, given that China’s economic growth has become more dependent on exports than in 2018.
China's economic struggles include deflationary pressures, sluggish real estate investment, and high youth unemployment. China faces prospects of higher tariffs under the Trump administration amid a precarious domestic situation that includes deflation, falling property prices, rising youth unemployment, poor household confidence, stagnant real estate investment, and growth in real retail sales at half the pre-pandemic rate.
Robert Lighthizer, Trump's protectionist US Trade Representative from his previous administration, has been re-designated to assume the same role in the next cabinet. During the presidential campaign, Lighthizer and Trump were unequivocal about their desire to implement a punishing tariff schedule (60 per cent or above) on imports of Chinese goods.
"In comparison, India appears as the most insulated market on this framework, benefitting from relatively low trade exposure with the US, manageable leverage and a particularly low level (and declining) in foreign equity ownership," CLSA said. In addition, US investment flows would likely continue to diversify away from China under a Trump administration as 'China plus one' strategies continue to formalise.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
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