Sensex, Nifty In Focus; Why CLSA Shifts Attention From China To India? 20% Overweight On Indian Stock Market

Amidst sharp offloading from foreign institutional investors (FIIs) in Indian stock market, global brokerage has decided to key movement, reversing its earlier tactical allocation shift from India to China. The reason for CLSA leaning more towards Indian market is because of Donald Trump's return to White House, which is heralding a trade war escalation. CLSA has announced 20% overweight on India.

In its latest report, CLSA calls India as 'Pouncing Tiger' while sees China as 'Prevaricating Dragon'.

With Trump's win to US election 2024, higher yields and inflation expectations are sapping scope for Fed in rate cuts, and thus People's Bank of China (PBOC) is expected to ease its policy stance ahead.

According to CLSA, policymakers continue to face an 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.

After PBOC's latest easing, the real interest rate continues to remain above 2.8%. Also, China's Finance Minister Lan Fo'an has signalled 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', it highlighted.

Accordingly, in the case of China, CLSA is concerned 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.

But India is expected to benefit from an appreciable moat should trade hostilities heat up again with Trump 2.0.

By contrast, CLSA FINDS India is 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 FX stability in an era of a strengthening US dollar.

Paradoxically, CLSA said, "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."

After Sensex touched an all-time high of 85,978.25 and Nifty 50 logged its lifetime high of 26,277.35 in September month, foreign institutional investors (FIIs) shifted their gears to the China market which was cheaper compared to the overvalued Indian market. Indian benchmarks have outperformed their counterparts in Emerging Markets (EM).

Thereby, FIIs tone from being buyers of Indian stocks with an inflow of Rs 15,423.32 crore in September 2024, shifted to being net sellers so much so that in 2024 they carried their record selloffs in the Indian market. In October month, FIIs carried record monthly outflow of Rs 1,14,445.89 crore, followed by an outflow of Rs 29,533.17 crore from November 1-15 of 2024.

Owing to FIIs' consistent selling pressure, Sensex touched its lowest level of 77,580.31 since late June. From their record highs, the Sensex has nosedived by 8,397.94 points and Nifty 50 plummeted by 2,744.65 points.

However, the situation in Indian stock market has been cushioned by strong buying from domestic institutional investors (DIIs) which CLSA also takes note of.

Unlike FIIs volatility, DIIs have been buyers throughout 2024. Its record buying was seen in October to the tune of Rs 1,07,254.68 crore, while in November month so far, it pumped in Rs 26,522.32 crore in Indian stocks. In 2024 so far, DIIs have made their strongest investment in history in Indian stocks to Rs 4,74,388.86 crore.

Hence, CLSA is sceptical on the endurance of the China equity meltup. It said, "Our initial reaction was to rent rather than buy the rally, yet we committed funds at the start of October by tactically deploying some of our overexposure on India to China."

CLSA added, "We now reverse that trade. Both MSCI China and India have corrected by c.10% in US dollar terms over the duration so we did not lose on making the switch."

However, CLSA believes that the chief risk to Indian equities is a frenzy of issuance swamping the market. Cumulative 12-month issuance is 1.5% of the market cap, a historical tipping point, as per the brokerage.