CLSA notes that Chinese equities have faced a series of setbacks, described as a “triple of misfortunes”. The brokerage firm points to a resurgence of trade tensions, particularly under a “Trump 2.0” scenario, which could escalate a trade war at a time when exports have become a key driver of China’s economy.
In addition, CLSA believes that the stimulus measures announced by China’s National People’s Congress (NPC) are not enough to stimulate growth. “NPC stimulus equates to risk aversion with little reflationary benefit,” he says.
Additionally, the firm points to rising U.S. yield and inflation expectations, limiting the ability of both the U.S. Federal Reserve and China’s central bank, the PBOC, to ease monetary policy.
CLSA is concerned that these factors could cause offshore investors to withdraw from China, especially those who invested after the initial PBOC stimulus in September.
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Derivative analysis made simple
In contrast, CLSA believes that India is in a better position. The firm argues that India is less exposed to trade tensions, especially given the uncertainty surrounding US-China relations. “India remains least exposed to Trump’s adverse trade policy among regional markets,” says CLSA. Additionally, the firm sees India as a potential safe haven for foreign exchange stability, if energy prices remain stable even with the strength of the US dollar.
Despite strong foreign sales in India since October, CLSA observes that domestic demand remains strong, helping to offset foreign fears. CLSA also notes that, while India’s market valuation remains high, it has become “a bit more palatable” for investors, with many waiting for a buying opportunity to address their low exposure to India.
However, CLSA also presents potential risks for India. Firms are witnessing an increase in market issuance, which could pose a challenge to the Indian equity market. “Cumulative 12-month issuance is 1.5% of market cap,” CLSA warns, adding that this level is approaching a historical tipping point that could weigh on market performance if demand does not keep pace with the flow of new shares.
Initially skeptical about the endurance of the China equity rally, CLSA deployed funds in China in early October. However, after a correction of around 10% in both MSCI China and India against the US dollar, the firm now reflects on that trade with caution.
“Both MSCI China and India have improved c.10% in US dollar terms over the period, so we have not lost out on the switch,” CLSA said.
CLSA’s new strategy now includes 20% more investment in India, as it believes China’s economic outlook has become more uncertain.
CLSA focuses more on India than China:
- Valuations are slightly lower than what they used to steal
China is now trading at a cyclically adjusted earnings multiple of 12.0x versus 9.2x at the start of September or 8.2x at the start of the year. That’s still a discount to the rest of emerging markets—EM trades at a CAPE of 14.0x excluding China—but not as extreme as the 36% discount on offer in early September.
China’s market-implied equity risk premium is at 9.8%, now on average since January 2022, compared with 10.8% in early September, the highest risk premium placed on Chinese equities by the market since 2006.
Similarly, on an asset-based multiple, China has recovered somewhat relative to EM peers, now trading at a 20% price book discount versus a 30% discount on offer in September, while still offering the same profitability as overall EM (ROE). does 11.0% for China versus 11.6% for EM).
- Restoring India from 10% overweight to 20%
MSCI India has improved by c.10% against the US dollar since we cut the peak of its exposure in early October, or 12% from the September 27 peak. Paradoxically, India has recorded cumulative net foreign investor sales of US$14.2 billion since early October (almost completely unwinding US$16.6 billion of net purchases from June to September), while investors we’ve met throughout the year have been especially looking forward. A buying opportunity to address underexposure to what is a major scalable growth opportunity in EM.
- India has subsequently become a relative poster child of EM FX stability
India remains sensitive to energy prices (86% of the country’s oil consumption is imported, 49% of its natural gas and 35% of its coal needs) and we are concerned about the potential for a risk premium in oil prices or, at worst, in supply from significant Iran-Israel tensions. disruption. However at least partially mitigating this risk is the c.10% discount applied to c.40% of oil imports that are sourced from Russia.
- Earnings momentum has softened, but the outlook remains strong
India’s earnings growth has slowed but is strong. Rare earnings surprises since December 2023 have boosted confidence, with projected EPS growth of 18% and 14% for 2025/26. A stable 12-month EPS forecast and expected GDP growth support these estimates. Rupee stability and local currency earnings have also pushed dollarized EPS back to its 30-year trend.
- The valuation, though expensive, is now a bit more palatable
Valuations in India have moderated, though still high. Cyclically adjusted PE fell to 33.5x from 37.9x, and its price-to-book ratio fell to 4.0x from 4.5x. The warranted book multiple, estimated at 3.5x, reflects a reduced premium. India’s price book premium over EM, justified by higher ROE (15.8% vs. EM’s 13.1%) and lower COE, is aligned with its strong growth outlook.
- Trump 2.0 poses new threats to growth
Trump’s re-election could weigh on global growth, with Robert Lighthizer returning as US Trade Representative, advocating steep tariffs (60%+) on Chinese imports. China’s potential retaliation — tariffs, halting US agricultural imports, RMB devaluation — could lead to initial disruptions ahead of potential trade talks.
While China’s direct US trade exposure appears limited (2.9% of GDP), indirect channels through third-party nations and growing export dependence increase its vulnerability. The EU and other partners have also imposed measures against Chinese exports such as EVs and steel.
India stands to benefit, showing resilience with low US trade exposure, manageable debt and declining foreign equity ownership. Rising Chinese labor costs and supply chain issues could further shift US investment away from China, reinforcing the “China plus one” strategy.
(Disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. These do not represent the views of Economic Times)
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