Global brokerage firm CLSA has made a strategic reversal, increasing its allocation to Indian equities while cutting back on its exposure to China. This change follows months of challenges in Chinese markets, further compounded by the re-election of Donald Trump and his protectionist trade policies.
In its report titled Pouncing Tiger, Prevaricating Dragon, CLSA highlighted the mounting difficulties faced by China’s economy, including deflationary pressures, stagnant real estate investment, and high youth unemployment. These issues have contributed to the brokerage’s decision to reduce its overweight exposure to China.
Challenges in China Drive Reassessment
China’s struggles have been exacerbated by the prospect of higher tariffs under Trump’s second term, with his administration likely to pursue escalated trade tensions. The return of Robert Lighthizer as Trade Representative signals a continuation of protectionist policies, including the implementation of punishing tariffs on Chinese goods.
CLSA outlined China’s precarious domestic situation, which includes:
- Deflationary trends.
- Falling property prices.
- Sluggish real estate investment.
- Youth unemployment reaching record highs.
- Growth in real retail sales remaining at half its pre-pandemic rate.
“Misfortune has played out in threes for Chinese equities over the past week,” CLSA stated, citing Trump’s re-election, the escalating trade war, and domestic economic woes as key reasons for the shift.
India’s Relative Stability and Appeal
In contrast, India has emerged as a relatively insulated market, with CLSA describing it as a “relative oasis of FX stability” in the face of a strengthening US dollar. The brokerage noted several factors supporting its renewed focus on India:
- Lower trade exposure to the US.
- Manageable corporate leverage.
- Domestically oriented equity market.
- Strong domestic retail appetite, with 83% of Indian equities owned by local investors — the highest proportion among emerging markets.
Energy prices remain a risk factor for India, given its reliance on imported oil (86%), natural gas (49%), and coal (35%). However, the Reserve Bank of India’s foreign exchange reserves of $700 billion serve as a buffer to defend the rupee against volatility.
Market Dynamics and Strategic Shifts
CLSA initially upgraded India’s status in October 2023, moving from 40% underweight to 20% overweight due to favourable credit conditions, discounted Russian crude, and robust GDP growth prospects. By late 2024, it adjusted its allocation, reducing India’s overweight to 10% and increasing China’s to 5% amid what appeared to be early signs of a recovery in Chinese markets.
However, the brokerage has now reversed this position, citing sustained challenges in China and India’s relative resilience.
“Indian equities are among the least exposed in the region to Trump’s adverse trade policy. As long as energy prices remain stable, India offers a unique combination of growth and stability,” CLSA noted.
The brokerage also acknowledged that the valuation of Indian equities, while still high, has become more palatable following a 10% correction in both MSCI India and MSCI China indices in US dollar terms.
Risks to Indian Markets
Despite the optimism, CLSA cautioned against potential risks in Indian markets, particularly the impact of a flurry of equity issuances.
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“The chief risk to Indian equities is a frenzy of issuance swamping the market,” the brokerage warned, noting that cumulative 12-month issuance has reached 1.5% of market capitalisation, a historical tipping point.
China-Plus-One and India’s Advantage
CLSA anticipates that US investment flows will continue diversifying away from China under Trump’s administration as businesses increasingly adopt “China-plus-one” strategies. India, with its large domestic market and relatively low reliance on exports to the US, stands to benefit from this trend.
“India remains one of the few emerging markets where corporate earnings growth aligns with economic output growth,” the brokerage noted, attributing this to India’s domestically focused equity market.
CLSA’s decision to shift its focus back to India underscores the nation’s growing appeal in the face of global economic uncertainty. With strong domestic demand, robust foreign exchange reserves, and a stable economic environment, India offers a compelling alternative to the challenges currently facing China.
As the geopolitical landscape evolves, CLSA’s renewed confidence in Indian equities highlights the country’s potential as a key investment destination in the emerging market sphere.
