CLSA Raises China Exposure, Cuts India Overweight To 10% Citing 'Three Witches'

CLSA Ltd. has reduced its exposure to Indian equities to accommodate its increased bet on the Chinese stock markets, as per a note issued by the global brokerage firm.

"We raise China to 5% overweight by cutting our India overweight to 10% from 20%," CLSA stated.

The decision comes amid renewed interest in Chinese markets, following the fiscal stimulus measures announced by the country last month.

Globally, investors rushed to Chinese equities last week, leading to a decline in other emerging markets. Nifty 50, the benchmark Indian index, closed 4.5% lower on a weekly basis on Friday as foreign institutional investors pulled out over Rs 40,000 crore from the domestic market.

"Oil price, new issuance and retail investor appetite" are the "three witches" of the Indian equity market, CLSA said.

First, the market is liable to be saturated by new issuance, which has reached a record 12-month cumulative total of $55 billion, the brokerage said.

"Second, as India is a large net oil importer, the rupee is vulnerable to elevated oil prices, which have, in the past, ended episodes of outperformance. Prices are rising with growing tension in the Gulf," it added.

The third risk is "any erosion of domestic retail appetite," given the fact that this investor class has been powering the bull market, it added. The recent steps taken by the Securities and Exchange Board to further regulate futures and options trading in equity derivatives may also reduce demand, according to the brokerage.

"Compounding these risks is the potential for foreign investor rotation from India to China, although Indian equity foreign ownership of just 17% minimises the impact," it said.

For policymakers in China, "it's a now or never" chance to deliver, CLSA said. The country may cause "lasting damage to household confidence" "should last week's concerted monetary policy initiative not be supplemented by a sizeable fiscal stimulus to ignite domestic demand and break the deflationary deadlock," it added.

While CLSA has increased its exposure to China, it noted that the return on equity remains stronger for India at 15.4% as compared to 11% in China. Similarly, the consensus 12-month forward earnings per share growth is seen at 15% in India versus 11% in China, it further added.

"Strategically, we argue India still offers the strongest scalable EM growth story. This represents in our minds only a temporary reduction in Indian equity exposure," CLSA stated.