INVESTMENT FOCUS BACK ON INDIA - ECONOMY

INVESTMENT FOCUS BACK ON INDIA - ECONOMY

NEWS: Global capital markets and investment group CLSA initially increased exposure to China at the start of October 2024. CLSA's India overweight is shifting back to 20% after being temporarily reduced to 10%.

WHAT’S IN THE NEWS?

Recent Market Corrections in China and India

  • Market Decline Since October:

·         Both China and India market indices saw corrections of about 10% in US dollar terms since early October.

·         India's cyclically adjusted Price-to-Earnings (PE) ratio decreased to 33.5x, down from September's peak of 37.9x.

India’s Appeal Amid Global Economic Uncertainty

  • Relative Stability Against Global Headwinds:

·         India is considered less vulnerable to adverse global trade policies, especially from the US, positioning it as a potential safe haven for investors.

·         Strong forex stability amid a strengthening US dollar adds to India's appeal.

  • Foreign Investor Activity:

·         Significant foreign investor selling occurred in October, driven by concerns over valuation and global risks.

·         CLSA reports that many foreign investors were waiting for this correction as a buying opportunity to address under-exposure to India.

  • Domestic Investor Resilience:

·         High domestic ownership of Indian equities (83%—the highest among emerging markets) mitigates foreign sell-off effects.

·         Strong domestic demand remains robust, balancing foreign jitters.

Strength of Domestic Investments in India

  • Increased Inflows into Domestic Mutual Funds:

·         Rolling three-month cumulative inflows into domestic equity mutual funds surged to 0.42% of market cap, nearing record highs.

·         October saw record monthly contributions to systematic investment plans (SIPs), totaling ₹253 billion, offsetting foreign exits.

  • Domestic Orientation of Indian Market:

·         India's equity market is more domestically driven, creating a clearer link between corporate earnings growth and economic performance.

·         CLSA sees this domestic focus as a positive factor, providing greater resilience in volatile global conditions.

Key Risks for Indian Equities

  • Potential Risk from New Equity Offerings:

·         A potential flood of new stock offerings could pose a threat to market stability.

·         Cumulative 12-month rolling issuance of Initial Public Offerings (IPOs) and secondary offerings reached a record $66 billion in October 2024.

Challenges and Risks for China

  • Impact of Trade Wars:

·         Any escalation in global trade tensions, particularly involving the US, poses a significant risk to Chinese equities and the renminbi.

·         China's economic growth has become increasingly reliant on exports, exacerbating vulnerabilities to external shocks.

  • Shift in China's Economic Policy:

·         Recent economic measures from China are focused on risk management rather than aggressive expansion.

·         Rising US 10-year bond yields and inflation expectations limit China's monetary policy options.

·         Concerns over currency stability restrict the People's Bank of China from pursuing large-scale economic reflation efforts.

Broader Economic and Financial Trends

  • Global Interest Rate Environment:

·         Rising US interest rates and inflation expectations lead to reduced expectations for rate cuts by the Federal Reserve.

·         Tightening global financial conditions could limit policy flexibility for export-driven economies like China.

Summary of Strategic Shifts

  • India’s Strengths:

·         Domestic market orientation and resilience to global trade disputes.

·         Strong domestic investor participation counteracting foreign market sell-offs.

·         Attractive valuation after recent market correction.

  • China’s Vulnerabilities:

·         Export dependency increases sensitivity to global trade tensions.

·         Limited room for expansive fiscal and monetary policies due to concerns over currency stability.

·         Potential risks from a stronger US dollar and higher global interest rates impacting China's growth prospects.