CLSA Reverses Strategy: Shifts Focus to Indian Equities with 20% Overweight

Global brokerage CLSA has shifted its focus back to Indian equities, reversing a recent tactical reallocation to China. This decision reflects evolving geopolitical dynamics, economic conditions, and market opportunities. Below is a detailed summary of CLSA’s rationale and insights:

CLSA’s Shift Back to India

1. Geopolitical Considerations:
   Donald Trump’s return to the White House is expected to reignite trade tensions, with India being relatively shielded compared to China. India’s lesser exposure to Trump-era trade policies makes it a more favorable investment destination during this geopolitical shift.
2. Currency and Energy Stability:
   India offers a haven of stability, benefiting from manageable energy prices and FX resilience amidst a strong US dollar. These factors enhance its appeal for investors seeking stability in emerging markets.
3. Domestic Resilience:
   While Foreign Institutional Investors (FIIs) have sold Indian equities aggressively, Domestic Institutional Investors (DIIs) have consistently supported the market. DIIs recorded historic investments in 2024, with ₹1,07,254.68 crore in October alone, cushioning the market from external pressures.
4. Valuation Adjustments:
   After corrections in Indian markets, valuations are now more attractive. CLSA notes that many investors have been waiting for this opportunity to address their underexposure to India.

Challenges in China’s Market

1. Economic Pressures:
   China’s economy faces challenges including deflation, declining property prices, rising youth unemployment, and weak consumer confidence. Retail sales growth remains at half the pre-pandemic level, underscoring structural weaknesses.
2. Policy Ineffectiveness:
   Although the People’s Bank of China (PBOC) has eased monetary policy, real interest rates remain elevated at over 2.8%, limiting the impact of such measures. Policymakers have announced plans to recapitalize banks, reduce property inventory, and boost consumption, but investor confidence in these initiatives is waning.
3. Investor Sentiment:
   CLSA observes that investors are losing patience with China’s policy responses, which are perceived as insufficient. This skepticism has reduced confidence in the sustainability of China’s equity rally.

Indian and Chinese Market Performance

• India:
  Indian equity benchmarks touched record highs in September 2024, with the Sensex reaching 85,978.25 and the Nifty 50 at 26,277.35. However, FIIs’ record outflows in October and November triggered a correction, with the Sensex dropping to 77,580.31. Despite this, DIIs offset the volatility with strong buying.
• China:
  CLSA initially shifted funds to China in October, capitalizing on a rally. However, with both MSCI India and MSCI China correcting by 10% in USD terms CLSA has decided to reverse this trade. The brokerage is now concerned about China’s long-term growth prospects and policy delays.

CLSA’s Indian Market Outlook

• Increased Allocation:
  CLSA has announced a 20% overweight position on Indian equities, referring to India as the “Pouncing Tiger,” in contrast to China’s “Prevaricating Dragon.”
• Structural Strengths:
  India’s robust domestic demand, manageable inflation, and strong DII activity position it well for growth. CLSA also highlights India’s relatively low vulnerability to adverse global trade policies.
• Risks to Watch:
  CLSA warns of potential risks from a surge in equity issuance, which could dilute market returns. Historical data indicates that cumulative 12-month issuance exceeding 1.5% of market capitalization is a tipping point.

CLSA’s renewed focus on India underscores its confidence in the country’s resilience and growth potential amid global uncertainties. While challenges like valuation pressures and issuance risks persist, India’s stable macroeconomic environment and strong domestic investor base make it a compelling market for long-term investment.