China's CLSA ups India exposure on supportive macroeconomic outlook

Brokerage goes 303 bps overweight on domestic markets in MSCI Asia Pac ex-Japan portfolio

CLSA has increased its India allocations citing a supportive macro outlook. The brokerage owned by China’s CITIC Securities has assigned a weighting of 18.2 per cent to India, 301 basis points higher than the nation’s weighting of 15.1 in the MSCI All Country Asia Pacific ex-Japan index. 

“We posit that in combination, a strong credit impulse, favourable energy pricing, improving external balance dynamics, robust GDP and EPS growth, increasing profitability, a supportive macro outlook, and additional capacity for non-resident asset accumulation will sustain the Indian equity momentum trade into 2024,” CLSA has said in a note. 

Previously, CLSA was 40 per cent underweight on India compared to its weighting in the MSCI index. “Our previous contrarian underweight position worked between late October 2022 and late March 2023 but ultimately we persisted for too long with our negative view. Valuations and RBI monetary policy inflexibility remain our principal concerns,” it noted.

Despite these concerns, CLSA believes that a positive trajectory for India's credit impulse will be supportive of the equity market. However, it struggles with “expensive valuation and relative lack of RBI policy flexibility”. At 2.8 times, India’s CAPE (cyclically adjusted PE) ratio is lower than the peak of 3.1 times in October 2022 but is still “distinctly unappealing,” according to the brokerage.

“India ranks as having among the least flexibility for interest rate accommodation versus EM (emerging market) peers on our monetary policy scorecard,” it said.

CLSA’s quality growth stocks and high conviction calls include Reliance Industries, HDFC Bank, ICICI Bank, Bharti Airtel, State Bank of India, Bajaj Finance, Larsen & Toubro, Axis Bank, ONGC, and Tata Motors.

Last month, Nomura upgraded its stance on the Indian market from “neutral” to “overweight”. In its Asia (excluding Japan) portfolio, the brokerage recommended an 18.2 per cent weighting for India, 100 basis points higher than India’s weighting in the benchmark MSCI Asia ex-Japan index. Nomura is also overweight on China and South Korea, while maintaining an underweight position on Singapore and the Philippines.