CLSA increases India portfolio allocation to 20% above MSCI benchmark

CLSA is the latest foreign investment advisory to join India’s bullish bandwagon after Goldman Sachs, Morgan Stanley and Nomura.

CLSA analysts, Alexander Redman and Della Chen, in “Incredible India: Raising exposure” report said: “we raise our regional allocation for India to a 20 per cent overweight stance. 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,” CLSA said adding “valuations and RBI monetary policy inflexibility remain our principal concerns.”

Reasons for turnaround

Recently, Nomura and Morgan Stanley upgraded India equity to Overweight. There were eight major reasons for CLSA’s turnaround – a rebounding credit impulse signalling robust equity momentum; more manageable energy pricing given discounted Russian crude; improving basic balance and likely bond inflows support the rupee; strongest economic growth across primary emerging markets; Indian equities trading at fair value on our model with 22 per cent upside; a return to superior relative profitability metrics for India vs EM; trend breakout in EPS growth supported by GDP and revisions; and foreign investors do not appear over-exposed to Indian equities.

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

Per its econometric regression model, Indian equities are now at a fair value relative to prevailing macro conditions in contrast to being 21 per cent overbought in November 2022 and 14 per cent overbought in June.

“Using CLSA 12-month forward economic projections, MSCI India offers 22 per cent US dollar upside through to October 2024, almost twice our expectations for the overall MSCI EM index,” the analysts said.

EPS growth

On first inspection, the trajectory of the consensus outlook for the progression of local currency Indian earnings growth appears extremely demanding relative to the past dozen years.

Specifically, consensus EPS estimates for FY24 and FY25 (ending March 2025 and March 2026, respectively) are above the initial forecasts made by sell-side analysts. “Not in a single year since at least 2011 has the final EPS outturn come even close to beating initial expectations. Indeed, the average for the dozen years from 2011 through 2022 has been a 28 per cent disappointment in final reported EPS versus analysts’ original forecasts.”

However, the outlook for India’s nominal GDP growth relative to trend is supportive of the FY24 and FY25 consensus EPS growth forecasts of 15 per cent and 13 per cent, respectively.

CLSA to use the funds raised from its China downgrade (October 3) together with funds made available by 45 per cent underweight stance on Australia (August 23) to upgrade Indian equities to 20 per cent overweight from 40 per cent underweight previously.

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