CLSA is reversing its trade that saw a tactical deployment of its over-exposure to India towards China at the start of October.
The brokerage will go back to being 20 per cent overweight on India after reducing its India overweight to 10 per cent. China will return to a benchmark exposure from 5 per cent overweight.
MSCI China and India have corrected by about 10 per cent in US dollar terms since early October. India’s cyclically adjusted PE multiple has somewhat retraced to 33.5x from a September peak of 37.9x.
Relative oasis
India appears among the least exposed regional markets to Trump’s adverse trade policy, the brokerage said and may offer a relative oasis of forex stability amid a stronger dollar.
“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,” CLSA said in a note.
Indian equities are 83 per cent domestically owned, the highest such proportion across emerging markets. Rolling three-month cumulative inflows into domestic equity mutual funds have accelerated to 0.42 per cent of market cap, just off a record high. Monthly contributions to systematic investment plans reached a record Rs 253 billion in October, helping offset selling by foreign investors somewhat.
“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,” CLSA said.
The chief risk to Indian equities is a frenzy of new offerings hitting the market. Cumulative 12-month rolling issuance comprising IPOs and secondary offerings reached a record $66 billion in October, according to CLSA.
Any escalation in the trade war would 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, CLSA observed. China’s stimulus suggests risk management rather than expansionary policy.
US 10-year yields and inflation expectations have risen with a commensurate drop in rate cut expectations implied by Fed funds futures. This restricts the room for China’s apex bank to reflate the economy for fear of amplifying currency weakness, the brokerage said.