MUMBAI: Global brokerage CLSA has made a significant U-turn on its India cut-back plan, raising its India allocation to a “20 per cent overweight” in a tactical shift, while reducing exposure to China. The move highlights India’s stable economic conditions and robust foreign inflows poised to re-enter the market.
This reversal comes as China faces fresh economic challenges. "Trump heralds a trade war escalation just as exports become the largest contributor to China's growth," CLSA noted in a report on Friday, referring to Donald Trump’s re-election as US President.
Earlier, CLSA had shifted allocation from India to China, citing signs of recovery in the latter. However, despite this adjustment, India has continued to attract attention from global investors, many of whom have been waiting for a market correction to address their underexposure to Indian equities.
The brokerage cited India’s relative insulation from global trade tensions under Trump as a key factor, especially given the potential policy shifts in the US. It emphasised that India’s stable foreign exchange rate and strong economic indicators position it as a “safe haven in Asia” amid current uncertainties.
China, on the other hand, struggles with economic headwinds, including deflationary pressures, high youth unemployment, and a sluggish real estate sector. “Despite stimulus measures introduced by its central bank in September, the real interest rate remains high at 2.8 percent, limiting the scope for further rate cuts,” CLSA said.
While Chinese policymakers have signalled additional easing measures, delays and the lack of immediate, decisive action could lead to a “buyers’ strike” from offshore investors, who initially increased their exposure to China after the PBOC stimulus.
The report highlights India's strong domestic appetite for equities, which has offset valuation concerns and provided a buffer against foreign outflows. Domestic institutions have net purchased Rs 1.07 trillion worth of equities since October, even as foreign investors withdrew Rs 1.14 trillion, leaving the rupee under pressure.
“Several global investors we have engaged with have been waiting for such a correction to address their underexposure to Indian equities,” CLSA noted.
In October 2023, CLSA had upgraded India from 40 percent underweight to 20 percent overweight, citing a favourable credit environment, discounted Russian crude lowering energy costs, and robust GDP growth. By October 2024, however, it pared back its India allocation to 10 percent overweight, reallocating funds to China amid signs of recovery.
Now, with Trump’s re-election and China's mounting economic struggles, CLSA has renewed its preference for India. It also noted that risks to Indian equities remain, citing the high volume of new stock issuances, which have reached 1.5 percent of market capitalisation over the past year. "The influx of new shares can strain liquidity and weigh on the market if supply continues to outpace demand," it cautioned.
While valuations on Dalal Street remain high, CLSA views Indian equities as a more attractive long-term investment compared to China, where deflation, property market weakness, and subdued real estate investment continue to linger.