Citi Adjusts: China to Neutral, Bullish on India and S. Africa

Key Takeaway

• Citi downgrades China to neutral due to overextended rally, upgrades India to overweight on strong earnings and growth prospects.
• Adjustments in emerging markets also include South Africa to overweight, Southeast Asia to neutral, Poland and Saudi Arabia downgraded.
• Indian market faces volatility amid elections; Chinese stocks show resilience but face earnings challenges.

Emerging Market Dynamics

Citigroup Inc. strategists have recently adjusted their stance on emerging markets, highlighting a nuanced landscape where different countries exhibit varying fundamentals and prospects. In a note dated May 10, strategists including David Groman and Beata Manthey have downgraded China to neutral from its previous standing, citing a rally that has seemingly outpaced the underlying economic fundamentals. Conversely, India has been upgraded to overweight, buoyed by strong earnings momentum and projected growth, signaling a positive outlook for investors interested in the region.

The strategists emphasize that in the context of rising global valuations, the path forward for emerging markets lies in earnings growth. This perspective is particularly relevant for India, which is currently experiencing such growth. Additionally, Citigroup has adjusted its views on other regions, upgrading South Africa to overweight and Southeast Asia to neutral, while downgrading Poland to neutral and Saudi Arabia to underweight. These shifts reflect a broader reassessment of emerging markets amid fluctuating global economic conditions.

Chinese Stocks: A Closer Look

Despite a downgrade in Citigroup's emerging market allocation, Chinese stocks have shown resilience, with the CSI 300 Index rallying from its February low. This rebound is supported by several factors, including positive technical indicators, returning overseas investors, and an improving outlook for company profits. Notably, the index has surpassed key resistance levels and has seen a reversal in outflows, with overseas investors reducing total outflows significantly.

Moreover, the Chinese government's initiatives to stimulate the economy and support the equity market have contributed to a more favorable view among investors. Analysts have begun to boost their earnings-per-share forecasts for CSI 300 Index constituents for the first time in seven months, suggesting a potential bottoming out of the three-year slide in Chinese equities. However, it's important to note that first-quarter earnings results have largely fallen short of expectations, indicating that challenges remain.

Indian Market Volatility Amid Elections

In contrast to the Chinese market's technical rebound, Indian stocks have experienced volatility in the wake of ongoing general elections. The NSE Volatility Index has surged 88%, reflecting market concerns over the electoral outcome and its implications for Prime Minister Narendra Modi's Bharatiya Janata Party (BJP). A potential underperformance by the BJP could impact the government's reform agenda, affecting sectors such as infrastructure and global supply chain integration.

This period of uncertainty comes as Asian financial markets navigate through mixed responses to global and domestic factors, including potential rate hikes in Japan and measures by China to stabilize the yuan. Despite these challenges, the broader optimism in equity markets suggests a complex interplay of factors influencing investor sentiment in emerging markets.

Street Views

• David Groman and Beata Manthey, Citigroup Inc. (Neutral on China):

  "China’s recent rally has occurred despite weakening fundamentals; we downgrade to neutral."

• Citigroup Inc. Analysts (Bullish on India):

  "It upgraded India to overweight on strong earnings momentum and projected growth."

• Citigroup Inc. Analysts (Bullish on South Africa):

  "Citigroup upgraded South Africa to overweight."

• Citigroup Inc. Analysts (Neutral on Southeast Asia):

  "Citigroup upgraded Southeast Asia to neutral."

• Citigroup Inc. Analysts (Neutral on Poland):

  "It reduced Poland to neutral."

• Citigroup Inc. Analysts (Bearish on Saudi Arabia):

  "Saudi Arabia to underweight."