CLSA India Investment: Less than a week after Donald Trump won the US presidential election, Hong Kong-based brokerage firm CLSA has increased its investment in India by 20 percent and has announced reduction in investment, giving a big blow to China.
This is seen as a strategic reversal from the update made in early October, when it turned ‘overweight’ on China after Beijing’s first stimulus on September 24. The second tranche of China’s $1.4 trillion package came on November 8 and another tranche is likely in January 2025.
How big is the benefit to India?
Being ‘overweight’ means that Indian equities should outperform other markets. The reversal is also attributed to the escalation of the trade war between the US and China, with Trump proposing tariffs of up to 60 percent on Chinese imports into the US during his presidential campaign and the Chinese government rolling out a massive stimulus package aimed at protecting Chinese companies from losses.
Trump’s win has forced the Hong Kong brokerage firm to reverse its October forecast, now giving China ‘equal weight’ and India ‘overweight’. This coincides with India seeing a steady stream of net foreign investor sales of $14.2 billion since the start of October (almost completely offsetting the $16.6 billion of net buying from June to September).
Highlighting that valuations in India remain “expensive”, CLSA underlined that India appears to be the least vulnerable to Trump’s adverse trade policy among regional markets. Indian government officials believe that Trump as president will not be as damaging to India’s export basket as other countries, especially China.
In a note titled “Pounceing Tiger, Prevaricating Dragon”, CLSA said misfortune can happen three times, and that is what happened in the case of Chinese equities last week.
The brokerage firm said it was skeptical of the endurance of China’s equity meltup and its initial reaction was to rent the rally rather than buy it. “We nevertheless committed a bit more to India in early October by strategically deploying some of our overexposure towards China, reducing our India overweight from 20 per cent to 10 percent at that time and increasing our China allocation to a 5 percent overweight above the benchmark. We now reverse that trade,” the firm said.
In a note to clients, CLSA said that while valuations in India remain expensive, they are now “slightly more palatable”. The recent Chinese stimulus package suggests risk management rather than expansionary policy, the note said.
London-based independent think tank Oxford Economics also expects that the impact of US tariffs will reduce overall exports from China and other targeted economies in the medium term. However, the impact will be concentrated in specific sectors, with significant impact on affected industries such as automobiles and steel.
It said, “Our assessment suggests that changes to the tariff regime could reduce total Chinese exports by only 0.5 percent in 2023, if tariffs are targeted. Needless to say, further retaliation and larger waves of tariffs in response could amplify and broaden these impacts, potentially leading to major policy changes such as a doubling-down on industrial exports in China.”
China has released a big package
Last week, China rolled out a $1.4 trillion loan package to boost its slowing economic growth. Finance Minister Lan Foan has left the door open for further measures in the new year to recapitalise banks, absorb excess asset inventories and stimulate consumption, but there is a lack of confidence that this will be enough to warrant China’s improved performance, CLSA said.
“Given recent developments, we no longer have sufficient confidence to maintain above-benchmark risk on Chinese equities into 2025,” CLSA said.
Trump 2.0 triggers an escalation of a trade war, which could potentially prove disruptive for Chinese equity assets and the renminbi, given that China’s economic growth has become even more dependent on exports than in 2018.
“While the initial Trump Cabinet appointments are likely to take a more aggressive stance against China, the impact of their actions will not be felt for more than the next two months,” CLSA said in a note.
The brokerage firm’s decision comes as China’s total annual trade surplus, which is expected to soon surpass a record $1 trillion, is laying the groundwork for a more aggressive US trade war against China during Trump’s second term – supported by the Republican-controlled Senate.
According to a Financial Times report, Robert Lighthizer, a staunch protectionist and architect of Trump’s tariff battles, has been reappointed. In addition, other Trump appointees, including Marco Rubio, a hardliner with strong anti-China views, as Secretary of State, have indicated that Trump’s second term may go further in controlling China than his first term. This could benefit India tremendously in the times to come and it has already started auspiciously.
