CLSA does U-turn on China, ups India exposure after Donald Trump win

Reverses overweight; India once again biggest OW in Asia-Pac portfolio

Global brokerage firm CLSA has reversed its tactical overweight on China while raising its exposure to a 20 per cent overweight on India, asserting that the re-election of Donald Trump as the US President heralds a trade war escalation just as exports have become the largest contributor to Beijing's growth.

 

Stimulus measures by Beijing had made the Hong Kong-headquartered firm go ‘overweight’ on China in its Asia Pacific allocations while reducing India exposure. However, Trump’s victory has made the brokerage rethink, with China now an ‘equal weight’, and India becoming the biggest ‘overweight’.

 

China's recent economic woes, including trade tensions with the US and falling property prices, will likely continue to weigh on the Chinese equity market.  In contrast, India is seen as a more attractive investment destination due to its strong economic growth and relatively low exposure to trade risks, CLSA said in a note.

 

 

Even if Trump's administration does not apply the threatened tariff for fear of stoking US inflation, any escalation in the trade war would likely prove disruptive for Chinese equity assets and its currency, given that China's economic growth has become far more dependent on exports than in 2018, it said. 

 

The National People's Congress (NPC) stimulus has little reflationary benefit. Moreover, higher US yields and inflation expectations sap the scope for the Fed and, thus, the People's Bank of China (PBOC) to ease.

 

"We, therefore, reverse our tactical allocation in early October, returning to a benchmark on China and a 20% overweight on India,” the note said.

 

CLSA said Chinese policymakers face an unenviable blend of deflation, falling property prices, rising youth unemployment, poor household confidence, stagnant real estate investment, and growth in real retail sales at half the pre-pandemic rate.

 

India appears to be among the least exposed regional markets to Trump's adverse trade policy, and may offer a relative oasis of foreign exchange (FX) stability in an era of a strengthening US dollar as long as energy prices remain stable, it said.

 

"Paradoxically, India has seen strong net foreign investor selling since October, while investors we met this year have been waiting specifically for such a buying opportunity to address Indian underexposure. Domestic appetite remains strong, offsetting foreign jitters, and valuation, though pricey, is now a little more palatable," said the note.

 

CLSA said that the key risk to Indian equities is a frenzy of issuance swamping the market.

 

"Cumulative 12-month issuance is 1.5 per cent of market cap, a historical tipping point,” it added.