Global brokerage CLSA has made an important pivot in its investment strategies, returning to Indian equities and reducing exposure to China. .
The reversal is a significant move by CLSA. It initially increased its allocation of Chinese equities to October 2024, while reducing its overweight position in India to 10%.
This tactical adjustment was made to capture perceived signs that the Chinese market is recovering.
After reassessing the situation and noting persistent problems, CLSA chose to return to a higher allocation to India.
The uncertainty about China’s economic prospects has led to a change in strategy, with the aim of increasing its investment in India by 20 percent.
China faces a’misfortune of threes’
The report by CLSA, Pouncing Tiger and Prevaricating Dragon highlights three major setbacks for Chinese equity markets.
The re-election Donald Trump and Robert Lighthizer’s reappointment as US Trade Representative signals a return to protectist policies. This could include tariffs of up 60% on Chinese products.
Exports are playing an increasingly important role in China’s economic revival.
China’s economic problems are compounded due to a slowdown in real estate investment, a high youth unemployment rate, and the continued deflationary forces.
CLSA believes that despite the stimulus measures implemented by China’s National People’s Congress these efforts lack the strength required for a substantial economic recovery.
The brokerage commented that the NPC stimulus is a de-risking measure with little reflationary benefits.
Adding to China’s woes is the rising US yields, and the heightened expectations of inflation, which limit the ability of the US Federal Reserve, and China’s central Bank, the People’s Bank of China, to enact accommodating monetary policy.
CLSA expressed concern that these dynamics may trigger a withdrawal of offshore investors who had previously invested following the PBOC’s initial stimulus measures in September.
India: relative safety amid global uncertainty
India’s economy is less vulnerable to US protectionist policies and international trade tensions than China’s.
CLSA highlighted India’s relative immunity: “India appears to be among the least vulnerable of regional markets to Trump’s adverse trade policy.”
The Indian domestic investment appetite has remained resilient despite recent net outflows from foreign institutional investors of Rs1.2 lakh crore since October, driven mainly by rising inflation and lower second-quarter earnings.
This robust local demand helps to counter external pressures, and positions India as a stable option for investors around the world.
China’s valuations have fallen in value.
CLSA said China’s stock is now trading at a cyclically-adjusted earnings multiple of 12,0x, up from 9.2x early September and 8.2x when the year began.
This is still a discount compared to the rest of the emerging markets – EM excluding China trades at a CAPE 14.0x – but not as extreme as 36% discount offered in early September.
It also acknowledged that, while India’s equity markets remain expensive, the current valuations have moderated and made them slightly more attractive as an investment.
The cyclically-adjusted PE ratio has dropped from 37.9x down to 33.5x. Meanwhile, the price-to book ratio has dropped from 4.5x down to 4.0x.
This warranted multiple, estimated at 3.50x, now reflects an even smaller premium.
The brokerage firm also noted that India’s earnings growth, while softer, remains strong.
The projected earnings per share (EPS), for 2025/26, is expected to grow by 18% and 14% respectively, supported by stable GDP forecasts, and a strong rupee.
The dollarized EPS has also returned to its 30-year trend due to the stability of the rupee.
India faces a number of risks
CLSA, despite its optimism, also highlighted potential risks for Indian equities. This includes a surge in the market issuance.
The firm noted that cumulative 12-month issuance is approaching 1.5% of market cap. This threshold could weigh on the market performance if the demand does not keep pace.
The brokerage also maintains caution by pointing out India’s heavy dependence on energy imports, particularly oil, makes the country vulnerable to price changes.
“We are concerned about the possibility of a risk premium in oil prices or, at worst a substantial supply interruption due to tensions between Iran and Israel,” the statement said.
India is a relative oasis of stability in the midst of global market turmoil, so long as energy costs remain manageable.
Trump’s tariffs may cause a pivot from China
The brokerage expressed concern over Trump’s second-term, which could lead to new trade disruptions.
Lighthizer’s commitment of high tariffs may cause early economic turmoil and affect global growth.
CLSA highlighted China’s vulnerability via indirect trade routes, and its increasing export dependence.
As tensions continue to rise, US investments could shift further away from China. This is because corporations are continuing to implement “China plus one” strategy in order mitigate supply chain risk.
CLSA noted that India will benefit from this shift due to its scalable growth potential and manageable leverage. It also has a low foreign equity ownership in comparison to other emerging market.
This post CLSA shifts its focus from China to India amid Trump’s return and economic problems may be modified as new developments unfold.
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