Why in news?

In a strategic shift, Hong Kong-based brokerage CLSA increased its India allocation to 20% overweight, reversing its October stance favoring China. This change follows Donald Trump’s US Presidential victory and escalating US-China trade tensions, with Trump proposing up to 60% tariffs on Chinese imports during his campaign.

Despite China's recent $1.4 trillion stimulus measures, CLSA downgraded China to "equal weight," citing underwhelming economic packages and trade uncertainties. Meanwhile, Indian equities are expected to outperform, even as net foreign investor selling in India reached $14.2 billion since early October, nearly offsetting prior gains.

What’s in today’s article?

• CLSA (Credit Lyonnais Securities Asia)
• CLSA Shifts Focus Back to India Amid US-China Trade Tensions
• Why CLSA Bets on India?
• CLSA Highlights Key Risks for Indian Equities

CLSA (Credit Lyonnais Securities Asia)

• CLSA is a leading Hong Kong-based brokerage and investment group known for its equity research, sales, and trading services.
• Established in 1986, it provides financial advisory and capital markets expertise across Asia-Pacific and global markets, focusing on delivering insights to institutional investors.

CLSA Shifts Focus Back to India Amid US-China Trade Tensions

• India’s Resilience to Trump’s Trade Policies
  • CLSA highlighted India’s relative insulation from Trump’s aggressive trade policies compared to China, making Indian equities a safer bet.
  • Experts believe Trump’s actions would not significantly impact India’s exports. Despite India's high valuations, CLSA finds them "a little more palatable" now.
• Reversal of China Strategy
  • CLSA expressed skepticism about China's equity rally sustainability.
  • It reversed its October decision to increase China exposure, reducing its allocation back to benchmark weight.
  • This shift comes amid underwhelming Chinese stimulus efforts, which reflect risk management rather than growth-oriented policies.
• China’s Economic Challenges
  • China faces growing headwinds from escalating trade tensions and subdued stimulus measures.
  • Trump's proposed 60% tariffs and hawkish cabinet appointments signal more aggressive containment policies, potentially disrupting Chinese exports and equity markets.
  • Despite Beijing’s $1.4 trillion stimulus package, CLSA doubts its adequacy to ensure economic outperformance.

Why CLSA Bets on India?

• Market correction in India
  • India’s equities have corrected nearly 12% since September, creating an attractive buying opportunity for investors seeking scalable growth in emerging markets.
  • CLSA believes India's structural growth potential and limited trade exposure to Trump’s policies make it a compelling choice for long-term investments.
• Robust Forex Reserves Shield the Rupee
  • The Reserve Bank of India’s $700 billion forex reserves serve as a strong buffer for defending the rupee through active interventions, enhancing economic resilience amidst external shocks.
• Resilient Corporate Earnings Outlook
  • While Q2 FY25 earnings momentum has softened, the outlook for Indian corporates remains strong, supported by a domestically driven equity market.
  • CLSA noted a consistent link between India’s corporate earnings growth and economic output changes, unlike in other emerging markets.

CLSA Highlights Key Risks for Indian Equities

• Sensitivity to Energy Prices
  • India's heavy reliance on energy imports—86% of oil, 49% of natural gas, and 35% of coal—makes it vulnerable to global energy price volatility.
  • CLSA expressed concerns over potential supply disruptions due to Iran-Israel tensions, which could lead to a risk premium in oil prices.
• Risks from Record Primary Issuances
  • The Indian equity market faces a key risk from the acceleration in primary issuances, including IPOs and secondary offerings, which totaled $66 billion in October.
  • These issuances, now 1.5% of market cap, approach levels historically linked to peaks in secondary market momentum, potentially dampening investor sentiment in the near term.
    • An acceleration in primary issuances, like IPOs and secondary offerings, can dilute existing share values, divert investor funds from secondary markets, and saturate market supply.
    • This often dampens demand, affecting overall market momentum and valuations negatively.
• Appetite of retail investors
  • India has a strong and growing appetite for retail investors, driven by several factors such as:
    • Increasing Participation due to easier access through online trading platforms and mobile apps.
    • Systematic Investment Plans (SIPs)
    • Rising Financial Awareness
    • Government Reforms: Initiatives like tax incentives on equity-linked savings schemes (ELSS) and dematerialization of securities have boosted retail investor confidence.
    • Pandemic Shift - During the pandemic, low interest rates and surplus liquidity prompted many first-time investors to explore stock markets, leading to record Demat account openings.
  • An excessive influx of retail investors often leads to speculative trading, inflated valuations, and increased market volatility.
  • Such behavior can destabilize the market, creating price bubbles and misalignments that may not reflect fundamental economic or corporate performance, posing risks to long-term stability.