Global brokerage CLSA has made a significant strategic shift, increasing its focus on India while scaling back its exposure to China. This marks a U-turn from its earlier stance that heavily favored China as an investment destination.
The decision reflects changing dynamics in the global economy and the challenges China faces, including slower economic growth, regulatory crackdowns, and geopolitical tensions. Meanwhile, India’s robust economic performance, favorable demographics, and growing appeal as a destination for foreign investments have prompted CLSA to revisit its priorities.
This recalibration underscores the growing recognition of India as a key player in the global investment landscape, offering attractive opportunities in a range of sectors, from technology to infrastructure development. By shifting its focus, CLSA is aligning its strategy with emerging market trends and positioning itself to capitalize on India’s growth trajectory.
CLSA had previously reduced its overweight position in India from 20% to 10%, while simultaneously increasing its China allocation to a 5% overweight compared to the benchmark.
Global brokerage CLSA has reversed its earlier strategic shift favoring Chinese equities over Indian stocks, opting to increase its India allocation while reducing exposure to China.
In its report, titled “Pouncing Tiger, Prevaricating Dragon,” CLSA highlighted challenges in Chinese markets, particularly in the wake of Donald Trump’s re-election and its implications for U.S.-China trade relations.
China’s Challenges Spark Reassessment
CLSA noted that Chinese equities have faced a string of challenges, including the prospect of heightened tariffs under the Trump administration, deflationary pressures, sluggish real estate investment, and rising youth unemployment. The report pointed out that exports, now the largest contributor to China’s growth, are under threat due to trade war escalations.
“We were sceptical about the sustainability of the China equity rally but had tactically redirected some of our India overweight to China earlier in October. We now reverse that trade,” CLSA stated.
Previously, CLSA had reduced its overweight position in Indian equities from 20% to 10%, reallocating that portion to increase China’s allocation to a 5% overweight relative to the benchmark. The brokerage has now reverted to its original stance, citing stronger fundamentals for India.
Foreign Outflows from India vs. China’s Economic Struggles
India has witnessed sustained foreign investor outflows, with net sales of Rs 1.14 lakh crore in Indian equities since October due to weak Q2 earnings and rising inflation. However, CLSA observed that many global investors it engaged with were waiting for such corrections to address their underexposure to Indian equities.
Meanwhile, China continues to grapple with a precarious domestic situation characterized by falling property prices, stagnant real estate investment, poor household confidence, and retail sales growth at half the pre-pandemic rate.
India’s Relative Strength in a Challenging Global Landscape
Despite foreign outflows, CLSA emphasized India’s resilience amid Trump’s protectionist trade policies. India’s relatively low trade exposure to the U.S., stable energy prices, and manageable leverage provide a buffer against global economic headwinds. Additionally, India’s equity market is predominantly domestically owned, with 83% domestic participation—the highest among emerging markets—which helps offset foreign jitters.
“India offers a relative oasis of FX stability in an era of a strengthening U.S. dollar, supported by the Reserve Bank of India’s (RBI) substantial foreign exchange reserves, which it actively uses to defend the rupee,” CLSA said.
Risks and Opportunities for Indian Equities
While the outlook for Indian equities remains strong, CLSA identified potential risks. These include the risk of excessive market issuance, as cumulative 12-month issuance has reached 1.5% of market capitalization—a historical tipping point.
The brokerage also highlighted India’s sensitivity to energy prices, as the country imports 86% of its oil, 49% of its natural gas, and 35% of its coal needs. Escalating geopolitical tensions, such as those between Iran and Israel, could disrupt energy supplies and elevate oil prices, posing a risk to India’s economic stability.
However, CLSA underscored that India’s corporate earnings growth remains closely linked to its economic output, thanks to the domestically oriented nature of its equity market. This unique dynamic positions India favorably among emerging markets.
Strategic Implications of the Shift
The reversal in strategy comes as the global economic landscape evolves. The reappointment of Robert Lighthizer, a staunch advocate of protectionist trade policies, as U.S. Trade Representative signals a likely escalation of tariffs on Chinese imports. This development, coupled with the formalization of “China plus one” strategies, is expected to diversify U.S. investments away from China, potentially benefiting India.
CLSA concluded that while Indian equities remain relatively expensive, valuations are now more attractive following recent market corrections. “The strong domestic retail appetite, coupled with India’s insulation from adverse trade policies, enhances its investment appeal,” the report stated.
In October 2023, CLSA had upgraded India’s position, moving from a 40% underweight to a 20% overweight, citing robust GDP growth prospects, a favorable credit environment, and discounted Russian crude reducing energy costs. The latest strategic adjustment underscores CLSA’s renewed confidence in India’s long-term growth trajectory.
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