Spotlight back on India for CLSA brokerage

New Delhi: After foreign investors pulled out nearly Rs 1.2 lakh crore from India equities in the past couple of months, global brokerage firm CLSA on Friday said it has decided to reverse its earlier move away from India to China pursuant to Trump's victory in the US presidential election.

“We reverse our earlier tactical allocation shift from India to China,” CLSA said in a note titled ‘Pouncing Tiger, prevaricating Dragon’.

The brokerage underlined that trade war between the US and China may escalate under the second term of Donald Trump’s presidency. "Trump 2.0 heralds a trade war escalation just as exports become the largest contributor to China’s growth," it said.

India’s benchmark indices Nifty 50 and Sensex have lost more than one-tenth of their value since their end-September peak. Foreign institutional investors (FIIs) withdrawal from Indian equities is among the key reasons for the recent selloff in the Indian equities.

FIIs started shifting their investments from the Indian equities to the Chinese markets after Beijing announced a stimulus package to boost its economy.

Following the announcement of the stimulus package by the Chinese government, CLSA, in early October, decided to increase its exposure to China. The brokerage firm had announced a reduction in its overweight position in the Indian equities from 20 per cent to 10 per cent to accommodate a 5 per cent overweight in China.

“The NPC (China’s National People’s Congress) stimulus amounts to de-risking with little reflationary benefit. Finally, higher US yields and inflation expectations sap scope for the Fed and thus PBOC (People’s Bank of China) to ease,” CLSA said.

“We are anxious that these concerns lead to a buyers’ strike by offshore investors who built China exposure post the initial PBOC stimulus in September. We therefore reverse our tactical allocation in early October, returning to a benchmark on China and a 20 per cent overweight on India,” it added.

According to the brokerage, India would benefit from the US-China trade hostilities. “India appears as among the least exposed of regional markets to Trump’s adverse trade policy. Moreover, so long as energy prices remain stable, India may offer a relative oasis of FX stability in an era of a strengthening US dollar,” 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,” CLSA added.

According to CLSA, Trump 2.0 would be more challenging for China than the previous term. “Even if for fear of stoking US inflation Trump’s administration does not apply the full 60 per cent threatened tariff schedule to Chinese imports, any escalation in the trade war would likely prove disruptive for Chinese equity assets and the renminbi, given that China’s economic growth has become far more dependent on exports than in 2018,” it said.