India's status as a defensive bet waning? CLSA says foreign flows may head back to China stocks

India's defensive investment appeal during global uncertainty is diminishing, according to CLSA's recent India Strategy report. This shift stems from reduced trade friction between the United States and China, alongside improving regional diplomatic relations.

Global risk sentiment has significantly improved following reduced tensions in South Asia and progress in US-China trade discussions. On Monday, the two nations agreed to reduce reciprocal tariffs for three months. The US decreased duties on Chinese imports from 145% to 30%, whilst China reduced its tariffs on US products to 10% from 125%. Additionally, China agreed to remove restrictions on rare earth minerals and magnets exports, which are essential for advanced manufacturing.

Indian stock market indices declined in early trading on Tuesday, taking a pause following their most robust single-day advance in more than four years, which was driven by relief over the India-Pakistan ceasefire agreement.

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CLSA observed that India had emerged as a comparative leader and safe haven for investors during periods of increased global trade tensions and border disputes with Pakistan. "The rise in these fears made India a hiding place and second-best performing market since March," the brokerage said according to an ET report.

With the United States and China reaching a trade agreement, CLSA warns that "it may reduce the relative attractiveness in India," suggesting possible underperformance if investment flows redirect towards Chinese securities.

CLSA has revised its stance on the Indian information technology sector, elevating it to "overweight" from "underweight", reflecting improved global conditions. The firm has introduced Tech Mahindra into its model portfolio whilst substituting TCS with Infosys, noting the latter's advantageous position to capitalise on increased technology expenditure in the U.S.

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Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, supported this assessment. "Since the probability of a recession in the US has come down, Indian IT companies might benefit from the higher tech spending by US companies," he said.

Additionally, CLSA indicated a positive outlook towards consumer staples, utilities, real estate, banks and energy sectors. However, the firm maintained a cautious stance regarding industrials, materials, healthcare and discretionary sectors.

(Disclaimer: Recommendations and views on the stock market and other asset classes given by experts are their own. These opinions do not represent the views of The Times of India)