CLSA reverses tactical shift from India to China, says this on Dragon, Tiger & Trump 2.0 

CLSA in a global equity strategy note said it has reversed its earlier tactical shift from India to China, following the Trump win in the US elections. In the note "Pouncing Tiger, prevaricating Dragon", CLSA said its has reversed its tactical allocation shift from India to China, as misfortune comes in threes and it has played out with Chinese equities over the past week.

CLSA said it was sceptical on the endurance of the China equity melt up earlier. Its initial reaction was to rent rather than buy the rally, yet it committed funds at the start of October by tactically deploying some of its over exposure on India to China. "We now reverse that trade, Both MSCI China and India have corrected by 10 per cent in US dollar terms over the duration so we did not lose on making the switch," it said.

CLSA believes Trump 2.0 heralds a trade war escalation just as exports become the largest contributor to China's growth. The NPC stimulus amounts to de-risking with little reflationary benefit, it said.

"US yields and inflation expectations sap scope for the Fed and, thus, PBOC to ease. 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," CLSA said on November 14.

CLSA said China policymakers still face a 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. Post PBOC easing, real intrest rates remained at 2.8 per cent.

The Chinese Finance Minister Lan Fo'an hinted at further measures to recapitalise banks, absorb excess property inventories and stimulate consumption, with the next waypoints being the December Economic Work Conference and March Two Sessions'.

"We are concerned that investors have lost patience and are assuming policymakers will lowball further stimulus, and thus may use the advent of those two occasions as an opportunity to reduce exposure," it said.

India's case
CLSA said India benefits from an appreciable moat should trade hostilities between the US and China heat up again. It said 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 forex 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," it said.

The chief risk to Indian equities is a frenzy of issuance swamping the market, it said noting that the past 12-month issuance is at 1.5 per cent of market cap, a historical tipping point.