CLSA notes that Chinese equities have faced a series of setbacks, described as a “misfortune in threes.” The brokerage firm points to a resurgence of trade tensions, particularly under a “Trump 2.0” scenario, which could escalate the trade war at a time when exports have become a major key driver to China’s economy.
Additionally, CLSA believes that the stimulus measures announced by China’s National People’s Congress (NPC) are not enough to stimulate growth. “The NPC stimulus amounts to de-risking with little reflationary benefit,” it says.
Furthermore, the firm points to the rising U.S. yields and inflation expectations, which limit the ability of both the U.S. Federal Reserve and China’s central bank, the PBOC, to ease monetary policy.
CLSA is concerned that these factors could cause offshore investors to pull back from China, especially those who invested after the initial PBOC stimulus in September.
In contrast, CLSA believes India is better positioned. The firm argues that India is less exposed to trade tensions, especially given the uncertainty surrounding U.S.-China relations. “India appears as among the least exposed of regional markets to Trump’s adverse trade policy,” CLSA says. Additionally, the firm sees India as a potential safe haven for foreign exchange stability, provided energy prices remain stable, even with the strengthening U.S. dollar.Despite strong net foreign selling in India since October, CLSA observes that domestic demand remains strong, helping to offset foreign jitters. CLSA also notes that, while India’s market valuation remains high, it has become “a little more palatable” for investors, with many waiting for a buying opportunity to address their underexposure to India.However, CLSA also points out potential risks for India. The firm highlights a surge in market issuance, which could pose a challenge for the Indian equities market. “Cumulative 12-month issuance is 1.5% of market cap,” CLSA warns, noting that this level is approaching a historical tipping point that could weigh on market performance if demand does not keep pace with the influx of new shares.
Initially skeptical about the endurance of the China equity rally, CLSA had deployed funds into China at the start of October. However, after a correction of approximately 10% in both MSCI China and India in U.S. dollar terms, the firm now reflects on that trade with caution.
“Both MSCI China and India have corrected by c.10% in U.S. Dollar terms over the duration, so we did not lose on making the switch,” CLSA said.
CLSA’s new strategy now involves being 20% more invested in India, as it believes China’s economic outlook has become more uncertain.
CLSA further explains its increased focus on India over China:
- Valuations are slightly less of the steal they used to be
China is now trading on a cyclically adjusted earnings multiple of 12.0x, versus 9.2x in early September or 8.2x at the start of the year. That is still a discount to the rest of emerging markets—EM excluding China trades on a CAPE of 14.0x—but not as extreme as the 36% discount on offer in early September.
China’s market-implied equity risk premium at 9.8% is now at the post-January 2022 average level, down from 10.8% in early September, just off the highest-ever risk premium placed on Chinese equities by the market since 2006.
Similarly, on asset-based multiples, China has rerated somewhat relative to EM peers, now trading on a 20% price book discount versus the 30% discount on offer going into September, while still offering almost the same profitability as overall EM (ROE of 11.0% for China versus 11.6% for EM).
- Restoring India to a 20% from 10% overweight
MSCI India has corrected by c.10% in US dollar terms since we top sliced its exposure in early October, or by 12% since the 27 September peak. Paradoxically, India has recorded steady net foreign investor selling of a cumulative US$14.2bn since early October (almost fully unwinding the US$16.6bn 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.
- India has latterly become a relative poster child of EM FX stability
India remains sensitive to energy prices (86% of the country’s oil consumption is imported, 49% of natural gas and 35% of its coal needs) and we remain concerned about the potential for risk premium in the oil price or at worst, a substantive supply interruption from Iran-Israel tensions. Although at least partially mitigating this risk is the c.10% discount applied to c.40% of oil imports which are sourced from Russia.
- Earnings momentum has softened yet the outlook remains robust
India’s earnings momentum has slowed but remains strong. Rare earnings surprises since December 2023 have boosted confidence, with projected EPS growth for 2025/26 at 18% and 14%. Stable 12-month EPS forecasts and expected GDP growth support these estimates. Rupee stability and local currency earnings have also pushed dollarised EPS back to its 30-year trend.
- Valuation, though expensive, is now a little more palatable
India’s valuations, while still high, have moderated. The cyclically adjusted PE has dropped to 33.5x from 37.9x, and its price-to-book ratio is down to 4.0x from 4.5x. The warranted book multiple, estimated at 3.5x, shows a reduced premium. India’s price book premium over EM, justified by higher ROE (15.8% vs. EM’s 13.1%) and lower COE, aligns with its stronger growth outlook.
- Trump 2.0 poses new risks to growth
Trump’s re-election could stress global growth, with Robert Lighthizer set to return as US Trade Representative, advocating steep tariffs (60%+) on Chinese imports. China’s possible retaliation—tariffs, halting US agricultural imports, RMB devaluation—may lead to early disruptions before potential trade talks.
While China’s direct US trade exposure seems limited (2.9% of GDP), indirect routes through third-party nations and growing export reliance heighten its vulnerability. The EU and other partners have also imposed measures against Chinese exports like EVs and steel.
India stands to benefit, showing resilience with low US trade exposure, manageable debt, and declining foreign equity ownership. US investments could further shift from China due to rising Chinese labor costs and supply chain issues, reinforcing “China plus one” strategies.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
