Trump 2.0 Impact: CLSA Reverses On China To Go Overweight On India

CLSA Ltd. has done an about-turn of sorts, shifting its “tactical allocation” to India from China in the aftermath of Donald Trump’s win in 2024 US elections.

“The initial reaction (to the PBOC stimulus) 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,” analysts Alexander Redman and Wei Sheng Wan ⁠We said in a note titled ‘Pouncing Tiger, Prevaricating Dragon’ on Nov. 14, 2024. “We now reverse that trade.”

“Misfortune can happen in threes,” CLSA said.

• Trump 2.0 heralds a trade war escalation, just as exports buoy China’s growth.

• ⁠The China stimulus amounts to de-risking with little inflationary benefit.

• ⁠Higher US bond yields sap scope for US Fed and thus PBOC to ease rates.

“We are anxious that these concerns can lead to buyers’ strike by offshore investors who build China exposure post the initial stimulus in September,” the CLSA report stated. “We therefore reverse our tactical allocation in early October, returning to a benchmark on China and a 20% overweight on India.”

China has sought to spur consumer spending by subsidising purchases of home appliances to cars, in a stimulus announced earlier this year and ramped up in the last few months. The impact is showing already, as consumption growth surged to an eight-quarter high to nearly catch up with factory output.

A revival in domestic demand is crucial for Beijing. US President-elect Donald Trump has threatened a 60% tariff on most Chinese imports, wreaking havoc on exports that have so far propped up the Chinese economy in the absence of domestic demand. China is on track for a record trade surplus of $1 trillion this year, built on the back of cheap exports.

“India appears as among the least exposed to Trump’s adverse trade policy,” the CLSA note stated. “Moreover, so long as energy prices remain stable, India may offer a relative oasis of forex stability in an era of a strengthening US dollar.”

To be sure, India has seen fervent selling by foreign institutional investors of late. Since October, FIIs have offloaded $14.2 billion in stock—almost fully unwinding the $16.6 billion of net inflows in June-September. Blame China’s stimulus and Trump’s promise to cut US corporate tax rates to 15%. Additionally, India remains sensitive to oil price shocks, since 86% of the country’s oil consumption is imported.

Still, India remains a bright spot if one zooms out a little bit.

India Inc. has delivered a positive earnings surprise in the July-September quarter—an earnings-per-share growth that beat consensus expectations made a year ago. The sell-side consensus on FY25 and FY26 EPS growth estimates are 18% and 14%, respectively. That compares with China Inc.’s 10% and 11%, respectively.

“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,” the CLSA note stated. “So, we find it encouraging that our forecast acceleration of India’s nominal GDP growth through 2025/26 is sufficiently strong to validate the current consensus EPS growth estimates.”

The flight of foreign monies have made India’s frothy valuations palatable. Moreover, local buyers are picking up the slack.

“Investors we met earlier this year were waiting specifically for such a buying opportunity to address Indian under-exposure,” the CLSA note stated. “Domestic appetite remains strong, offsetting foreign jitters, and valuations—though pricey—are now a little more palatable.”

83% of Indian equities are domestically owned—the highest across emerging markets. At the same time, mutual fund investments via systematic investment plans reached a record $3 billion in October—compensating for FII outflows.

“Given the high domestic equity ownership, there is an especially faithful association between mutual fund inflows and momentum in the benchmark,” the CLSA note stated.

As far as valuations is concerned, India’s cyclically adjusted price-to-earnings ratio has corrected to 33.5 times from a peak of 37.9 times in September, according to CLSA.

In comparison, China—though still much cheaper—has become pricier: it’s currently trading at a cyclically adjusted price-to-earnings multiple of 12 times as against 9.2 times in September and 8.2 times at the beginning of the year.

While India remains sensitive to oil price shocks that may emanate from an Israel-Iran war, the country is partially offsetting risks by diverting the pipelines to Russia. 40% of India’s oil imports are now sourced from Moscow, that too at a 10% discount.

Additionally, even since India’s inclusion in the JPMorgan EM index, Indian bonds are increasingly finding favour among investors amid fluctuations in equity investments. That, along with rising exports, supports the country’s external position.

India’s trade deficit—or the gap between imports and exports—stood at $27.14 billion in October, as against $20.78 billion in the preceding month, according to government data released on Nov. 14. Exports grew 17.25% over the year-ago period to $39.2 billion. Imports rose 3.9% year-on-year to $66.34 billion.

“India has become a poster child of EM forex stability,” the CLSA note stated, against the backdrop of strengthening greenback in the aftermath of Trump’s US election victory.

“The Reserve Bank of India has managed to accumulate a veritable war chest of forex reserves (about $700 billion), which it actively deploys for forex intervention in defence of the rupee,” the note stated. “That is a realistic prospect given that India’s basic balance of payments funding gap…is currently close to 1% of GDP surplus—a level which has historically been associated with rupee’s stability versus the dollar.”

China is seen countering any likely Trump tariffs with more stimulus, and a weaker yuan. Already, Beijing has unveiled a $1.4 trillion debt swap for local governments but stopped short of unleashing a fresh stimulus.

An overwhelming majority of economists polled by Bloomberg said they expect China to raise the broad budget deficit in response to Trump’s re-election, the most among all policy options put forward in the survey. It is followed by loosening monetary policy, more housing support measures and greater investment in advanced manufacturing.

More than half of the respondents said Beijing may weaken the yuan, which would make Chinese exports more competitive and help offset some of the tariffs. They differed widely on the extent of any such currency depreciation, with estimates ranging from 7.3 to 8 per dollar for 2025.

“This depends on how much tariff we get from the US,” said Zhennan Li, an analyst with Banque Pictet & Cie SA in Hong Kong. He forecast the offshore yuan could weaken to 7.5 against the dollar if the Trump administration puts 20% additional levies on all Chinese imports and as much as 7.7, if the tariffs come in at 60%.

Some economists, including Raymond Yeung of ANZ Bank, said Beijing would want to stabilise the currency rather than engaging in competitive devaluation. A weakened yuan may encourage capital outflows and further discourage investors in a country on track to see its first annual net outflow in foreign direct investment since at least 1990.