In the past four days, my e-mailbox, WhatsApp message box and social media timelines have been inundated with copies of an Asia Pacific strategy report of a global brokerage. So far, I have received 127 digital copies of the 21 pages (5MB) report, with a rather Tharoorish title – “Pouncing Tiger, prevaricating Dragon”. (I needed to use a dictionary to find out the meaning of prevaricating). I am not sure how many of those sharing the report have actually read it. Most of them appear to have just forwarded it in the spirit of Diwali – just like Soan Papdi boxes exchanged on Diwali, which are never opened and tasted by intended recipients.
The strategy report makes two points that may be of any interest to the Indian investors – (i) Initiation of “Overweight China” trade in the month of September 2024 by some global brokerages was an error of judgement and needs correction; and (ii) the cut in India overweight from 20% to 10% was not warranted and is being restored.
It is important to note that brokerages remained overweight or equal weight on India, while leaning a bit towards China. This report is more about correction in China strategy and less about India. As of this morning no data is available as to how much selling the clients of this particular brokerage actually did in India since September 2024, and how much they would be buying in next few weeks to adhere to the brokerage’s strategy.
The reason cited for the change in strategy are:
a) Trump will herald Sino-US trade war escalation. Chinese NPC stimulus is not reflationary. Elevated US yields and inflationary expectations would prevent the Fed from cutting further, thus limiting the scope for further stimulus by PBoC.
b) India is amongst the least exposed regional markets to Trump’s adverse trade policy. FPIs are underexposed to the Indian equities and looking for buying opportunities. Valuations are now more palatable.
In my view, the brokerage might have committed another mistake to correct an earlier error. We still have two months before Trump’s inauguration and perhaps a few more months to see what his trade policies are going to look like, regardless of the election rhetoric. Six weeks may be too early to assess the impact of the Chinese stimulus. The latest earnings estimates used to derive the valuations of Indian equities might change in the next couple of quarters, if inflation does not ease and growth estimates are downgraded. There is no evidence that FPIs have remitted the dollars out of India in the past few months. The net FPIs flows have been positive (see here). FPIs may not rush to India with fresh bags full of dollars in the next few months. They may want to see how EM debt and currencies behave in 1H2025 in the wake of Trump and Fed policies.
In this context, I note the following, which makes me ambivalent about the impact of the change in heart of few global brokerages.
· Trump has spoken extensively about onshoring manufacturing to the US. This forms the fulcrum of his trade policies towards China and other countries that run trade surplus with the US.
In this context, it is pertinent to note that the US is home to countless unskilled, obese, and unwilling workers asking for a raise in US$18-20/day minimum wage. Trump’s choice for health secretary, Robert F. Kennedy, Jr., is exactly not promising a program to make this workforce fit enough to work 50hrs/week. It is not clear how President Trump would propose to compete with US$350/month wage Chinese workers who are regimented, skilled and healthy enough to work 70hr/week.
· In the year 2018, Trump imposed restrictions on export of high-end semiconductors to China. The Chinese government responded to this by investing massively in the high-end technology sector. Massive flows of capital were directed towards the industrial sector from real estate. Consequently, China is now close to attaining self-sufficiency in semiconductors. China has leapfrogged the US in several areas requiring high-end technology.
The point is that protectionist trade policies of the US may now help some of American businesses; but these policies may not hurt China in any significant way. China is even more geared now to export deflation to the western world, than before. The protectionist policies may impede India's interests noticeably.
· Naseem Nicholas Taleb, regarded as a visionary by many market participants, has recently warned Elon Musk in no uncertain words. He wrote on X (formerly Twitter) “Business people want to make things function; bureaucrats like to perpetuate dysfunction. I fear for @Elon as he is stepping harder and harder on the interests of the Deep State. I will light a candle for him at the Monastery of Hamatoura.”
Obviously, there are reasonable doubts about the success of Team Trump in implementing their election promises, especially those concerning the bureaucratic reforms in the US.
· The latest portfolio disclosures of Michael Burry, the legendary US trader/investor, suggest that recently he has been loading up on Chinese equities.
