Frenzy of IPOs Remains Chief Risk to Equity Market: CLSA

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CLSA Spotlights India After Reversing China Overweight Strategy

By S Jha

New Delhi, November 16: The Hong Kong-based CLSA has warned that the primary capital market offerings is a major risk to the equity markets. The CLSA, Asia’s one of the largest fund houses, in a report said that “frenzy of issuance swamping the market is a tipping point”.

“The chief risk to Indian equities is a frenzy of issuance swamping the market. Cumulative 12-month issuance is 1.5 per cent of market cap, a historical tipping point,” said CLSA in a report, titled ‘Pouncing Tiger, Prevaricating Dragon’ as a part of its global strategy paper.

The CLSA in its paper reversed the October call to go overweight with China. The fund house expressed disappointment with China’s pace of economy and also the inadequate stimulus size.

“China’s real growth in retail sales has progressed at half the pre-pandemic pace since 2020 as household confidence has been eroded by the outlook for the labour market and property prices (real estate still accounts for 51% of net household wealth, down from 63% in 2010). To that point, we argue the absorption by local governments of excess real estate inventory is critical to remove the perception of a market largely in oversupply, and put a floor under pricing and thus confidence,” said CLSA in its strategy paper.

In September this year, India’s stock market capitalization hit ₹463 lakh crore valuation which in dollar terms stood at $5.5 trillion. This was an all-time high market capitalisation. At the same time, the fund houses began giving calls to favour China, starting a market correction in India, wiping out significant valuation in the last two and a half months.

The CLSA warning has come ahead of the NTPC Green Energy IPO opening which in value size is ₹10,000 crores. The recent successful IPO of Waare Energy commanded subscription of 66 times than the offering. There are at least a couple of IPOs offerings each week in the Indian equity market amid the frenzy to list companies on the bourses.

Yet, CLSA has stated that after over 10 per cent correction India is a better bet than China. “On our calculations, there may be anything up to a decade of inventory to clear when including digesting developers’ housing projects already started at the current (12-month rolling) rate of transactions, together with investment properties that owners may have a propensity to offload if the market improves,” said CLSA on Chinese economy in its report.

It stated “we reverse our tactical allocation in early October, returning to a benchmark on China and a 20% overweight on India” “We are concerned that investors have lost patience and are assuming policymakers will lowball further stimulus, and thus may use the advent of those two occasions as an opportunity to reduce exposure. India benefits from an appreciable moat should trade hostilities heat up again,” added CLSA in its report.

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