Global brokerage firm CLSA has raised India allocation to a 20 percent overweight while cutting exposure to China in a tactical reversal, citing India’s stable economic conditions and robust foreign flows waiting on the sidelines to re-enter. This shift comes amid China’s fresh economic challenges as "Trump 2.0 heralds a trade war escalation just as exports become the largest contributor to China's growth," said CLSA in a note, referring to re-election of US President Donald Trump.
The decision reverses CLSA’s earlier allocation from India to China. The reversal comes even as India faces sustained foreign investor outflows, with FPIs pulling back amid weak September earnings and rising inflation. Foreign institutions have sold a net Rs 1.14 lakh crore of Indian equities since October.
CLSA said that several global investors it engaged with have been waiting for such a correction to address their underexposure to Indian equities. On the other hand, China's economic struggles include deflationary pressures, sluggish real estate investment, and high youth unemployment.
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In October 2023, CLSA had significantly upgraded India, moving from 40 percent underweight to 20 percent overweight. The firm cited a favourable credit environment, lower energy costs due to discounted Russian crude, and strong GDP growth prospects as key reasons for the upgrade at that time. However, by October 2024, CLSA adjusted its strategy, reducing India’s overweight to 10 percent, while adding to China amid what appeared to be early signs of a market recovery in the dragon nation.
India a safe haven amid global trade tensions
Given China's mounting economic challenges, CLSA has renewed its preference for India, citing a stable foreign exchange environment amid a strengthening US dollar. India’s relative insulation from global trade tensions under US President-elect Donald Trump administration, especially given potential policy shifts in the US, adds to its appeal as a safe haven in Asia. The brokerage firm noted that India’s stable FX rate and economic indicators position it as a key beneficiary in the current trade environment.
The report also highlighted the strong domestic appetite for Indian equities, which has helped offset valuation concerns and provided a buffer against potential foreign outflows. Domestic institutions have net purchased as much as Rs 1.07 lakh crore of Indian equities since October.
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While valuations remain high, CLSA considers Indian equities more attractive for long-term growth than their Chinese counterparts, where concerns over deflation, property market weaknesses, and subdued real estate investment continue to linger. Luke Barrs, Global Head of Fundamental Equity Client Portfolio Management at Goldman Sachs Asset Management, said earlier this week that Indian markets' recent multiples of 22-23x forward earnings have triggered rounds of profit-taking.
China's persistent economic headwinds
China, on the other hand, faces persistent headwinds. Despite stimulus measures introduced by the People’s Bank of China (PBOC) in September, the real interest rate remains relatively high at +2.8 percent, limiting the scope for further rate cuts. Chinese policymakers have signalled potential easing measures in the coming months, with major economic events such as the December Economic Work Conference and the "Two Sessions" in March expected to reveal more.
However, CLSA said that these delays and the lack of immediate, decisive action may lead to a "buyers’ strike" from offshore investors who initially boosted their China exposure post-PBOC stimulus.
The risks to Indian equities are not absent. CLSA pointed to the high volume of new stock issuances in India, which has now reached 1.5 percent of market capitalisation over the past 12 months -- a level the brokerage considers a potential tipping point. The influx of new shares could strain liquidity and weigh on the market if supply continues to outpace demand.
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