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In just over a week since Donald Trump won the US Presidency, Hong Kong-based brokerage firm CLSA raised its India allocation to a 20 per cent overweight, while cutting exposure to China. This is seen as a tactical reversal from its early October update when it went ‘overweight’ on China following Beijing’s first stimulus on September 24. China’s second tranche of a $1.4 trillion package came on November 8 and yet another likely in January 2025.
Turning ‘overweight’ essentially means Indian equities should perform better compared with other markets. The reversal is also attributed to an escalation of a trade war between US and China with Trump proposing up to 60 per cent tariff on Chinese imports into the US during his Presidential campaign and an underwhelming stimulus package by the Chinese government.
Trump’s victory has made the brokerage reverse its October call, with China now an ‘equal weight’, and India turning ‘overweight’. This incidentally comes when India has recorded steady net foreign investor selling of a cumulative $14.2 billion since early October (almost fully unwinding the $16.6 billion of net purchases from June through September).
While highlighting that valuations in India continue to be “expensive”, CLSA underlined that India appears as among the least exposed of regional markets to Trump’s adverse trade policy. Indian government officials are of the view that Trump as President would not be as detrimental on India’s export basket as those of other countries, especially China.
In a note titled “Pouncing Tiger, prevaricating Dragon”, CLSA said that misfortune can happen in threes and it has played out for Chinese equities over the past week. The brokerage said it was sceptical on the endurance of the China equity melt up and its initial reaction was to rent rather than buy the rally.
“Yet we committed a little more at the start of October by tactically deploying some of our over exposure to India towards China, at the time reducing our Indian overweight to 10 per cent from 20 per cent and raising our China allocation to a 5 per cent overweight from benchmark. We now reverse that trade,” CLSA said in its note to clients. It said though valuation in India is expensive, it is now a “little more palatable”. The note said that the recent China’s stimulus package suggests risk management rather than expansionary policy.
London-based independent think tank Oxford Economics also expected the impact of US tariffs to drag down total exports from China and other targeted economies in the medium term. However, the impact will be concentrated in specific sectors, with significant consequences for affected industries such as automobiles and steel.
“Our scenarios suggest that the shift in the tariff regime might reduce total Chinese exports in 2023 by just 0.5 per cent, if the tariffs are targeted. Needless to say, further retaliation and larger subsequent waves of tariffs in response could amplify and broaden these effects, potentially triggering wider policy shifts such as a doubling down on industrial policy in China,” it said.
Last week, China unveiled $1.4 trillion debt package to boost its flagging economic growth. CLSA said that Finance Minister Lan Fo’an has left the door open into the new year for further measures to recapitalise banks, absorb excess property inventories and stimulate consumption, but it lacks confidence that the magnitude would be sufficient to warrant China’s outperformance.
“In the light of recent developments we no longer have sufficient conviction to maintain an above benchmark exposure on Chinese equities heading into 2025,” CLSA said. Trump 2.0 heralds a trade war escalation, which could 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.
“Initial Trump cabinet appointees appear consistent in their China-hawkish credentials, but the impact of their actions will not be felt for more than another two months. The concern with this approach is that the market will be essentially directionless if there is a policy air pocket until Trump’s intentions are better formulated,” CLSA said in a note.
THE PROSPECTS of an escalating trade war between the US and China, with Trump proposing to impose up to 60 per cent tariff on Chinese imports, and a lower than expected stimulus by Beijing has prompted the global brokerage firm to bet on India now.
This comes as China’s overall annual trade surplus, expected to soon surpass a record $1 trillion, groundwork for a more aggressive US trade war against China during Trump’s second term—backed by a Republican-controlled Senate—has begun to take shape. According to a Financial Times report, Robert Lighthizer, a staunch protectionist and the architect of Trump’s tariff battles, is set for another stint pursuing Trump’s frequently cited trade goals of reciprocal market access. Moreover, other Trump appointees, including China hardliner Marco Rubio as Secretary of State, have signalled that Trump’s second term could go further in containing China compared to his first term.
The likelihood of a Trump-led trade war with China comes at a time when China’s trade surplus with the US in 2023 reached $380 billion. The comparable number barely stood at $70 billion in 2005. Lighthizer, US trade representative, under Trump’s first term has said that US liberal trade policies, especially towards communist China, was a mistake. According to CLSA, India appears as among the least exposed of regional markets to Trump’s adverse trade policy.
It said MSCI India has corrected by close to 10 per cent in US dollar terms since it top sliced its exposure in early October, or by 12 per cent since the 27 September peak.
“Paradoxically, India has recorded steady net foreign investor selling of a cumulative $14.2 billion since early October (almost fully unwinding the $16.6 billon of net purchases from June through September), while investors we have met over the year have been waiting specifically for such a buying opportunity to address underexposure to what is arguably the principal scalable growth opportunity in EM (emerging markets),” it said.
The brokerage further said India remains sensitive to energy prices (86 per cent of the country’s oil consumption is imported, 49 per cent of natural gas and 35 per cent of its coal needs), and it remains concerned about the potential for risk premium in the oil price or at worst, a substantive supply interruption from Iran-Israel tensions.
The note said that the Reserve Bank of India has managed to accumulate a veritable war chest of FX (forex) reserves (some US$700bn worth) which it actively deploys for FX intervention in defence of the rupee.
On corporate results in India, CLSA said through earnings momentum (in Q2 FY25) has softened, the outlook remains robust. India is one of the few emerging markets where a relationship between corporate earnings growth and the changes in the pace of economic output holds true, attributable to the country’s more domestically oriented equity market, it said. The brokerage highlighted that a chief risk for the Indian equity outlook is the acceleration in primary issuance which ultimately threatens to swamp the secondary market with supply.
“Cumulative 12-month rolling issuance (IPOs and secondary offerings) reached a record $66 billion in October, although we need to control for the increase in overall market cap when making historical comparisons,” it said. As a proportion of market cap, issuance has reached 1.5 per cent, close to the same level at which it peaked in the last four cycles in Indian issuance which in turn coincided closely with peaks in secondary market momentum, CLSA said.
