HSBC India Equity Strategist Amit Sachdeva shares key insights from India equity report. #BQLive
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00:00 tuning into Talking Point. I'm your host, Neeraj Shah. Our guest today is Amit Sachdev,
00:04 India Equity Strategist of HSBC. And they wrote a very interesting note on the 25th of March,
00:10 where they are talking about the flows, especially from the FII side, which have led the rally,
00:16 and how their observations suggest that one FII flows can still sustain, and the risk of a sharp
00:22 market decline is limited, even with moderate FII outflows as DI should cushion the market against
00:28 forestry. Amit, great having you. The first time that I believe we are talking. Thank you for
00:31 taking the time out. Thanks, Neeraj. Thank you for having me here today. Thanks a lot.
00:38 The pleasure is ours. And I want to start off with the key crux of the note that you wrote maybe four
00:43 or five days back, which is around flows. So please, without me leading a question,
00:48 please tell me your key observations first. So look, you know, India's flows is a very
00:54 interesting thing, because first of all, we should know where we are in the market cycle.
00:59 And flows is a large part of that. And why is that so? Because India is a secularly swelling,
01:06 you know, market. You don't need really much, if you take a very long view, it's a straight line
01:11 going up. Right. But the issue is that there are different actors act differently at different
01:18 times. FIs, for example, take a decisive view on India in different phases. And for any phase to
01:27 sustain FI flows are very critical. So any bullish phase to sustain FI is very critical. Now, where
01:34 we are right now, we have received about 19 billion in flows, right, which makes India as
01:42 one of the largest recipient of flows. About 85% of all ex-China Asia EM flows came to India.
01:51 Now valuation has risen to about some degrees above 5 year average. And now somebody can beg
01:59 a question whether they can do it. My sense is to get that answer, we should look at our own cycle.
02:05 We had five large bull phases, ex-COVID and four bear phases. Our view is that we are in the middle
02:13 of that bull run. We are in the bull run, doubtless. But bull run once set in has a little bit of
02:19 momentum. Typically, bull runs in India can last up to 30 months or so, right, unless they are
02:26 broken by some major events. And what those major events could be is a global crisis,
02:32 large onset of inflation, or something really going wrong with crude, right. These three major
02:38 things can break a bull run. We are in a bull run, but two things have happened, which we should be
02:45 aware of. Number one, market breadth is 83%. And also, the valuation is little above me, so
02:53 some discomfort there. We've seen crude uptick very recently going up. But I would argue
03:01 valuation is still tenable. FI flows, although have come in, they are about 0.7% of the 12-month
03:09 market cap. Peak bull run is about 3% of market cap, and average of bull run is 1.7. We have
03:15 a little bit room to grow. And why is that so? Because we have seen 15 months of incessant
03:21 outflow. And so the base is still benign. Valuation is tenable. And also, FI ownership
03:27 of Indian market is about 17.9%, still below cycle average of 19 and much below cycle peak.
03:35 So in some sense, although FI flows seem to look good, it still has a room to do a little bit more.
03:44 But breadth of 83 is a bit worrying now. But what it tells you, two things. Number one,
03:50 83% breadth can sustain if other things are good. But earnings are also good. So long as earnings
03:59 are sustained, the breadth can sustain even for a year. But if, for example, a few other things
04:04 go wrong, like crude goes very high up and earnings are downgraded, then probably this rally
04:10 is broken. So in some sense, if earnings are good, which I think looks good, and crude is not going
04:17 out of whack, we have a Goldilocks scenario. And FI flow base is benign. That would suggest that
04:23 any outflow will be very shallow and short-lived. Market has still room to expand.
04:28 Got it. Amit, just to put this into perspective,
04:34 Seter is paribus. If crude doesn't go out of whack, it's risen for the last four weeks,
04:38 but let's say it's circa $85-90 to a barrel. And if earnings, which have largely been in line thus
04:45 far, continue, then you are saying even for average cycle flows to happen, there is a lot of
04:51 room to go. Because I heard you say a statistic of 0.7, 1.7 for averages, and around 3% for peak.
04:58 So we're still some time away. Yeah, we are at 0.7%. Let me give you
05:03 a perspective. When the COVID happened, we received 34 billion in flows. And when the money was paying,
05:10 printed equity was very good. And between October 21 to June 22, market saw an outflow of 32 billion.
05:19 So almost entire flow that came in went down. Market was down 15%, cushioned by DI flow.
05:25 Since then, we have seen only intermittent flows, but largely outflow.
05:30 So if I ignore the period till March, we've seen 15 months of just outflow.
05:38 It's only five months we've seen outflow. Although it looks high, but we're sitting
05:42 on a very benign phase. Most funds are still underweight. All the flows have come in.
05:48 Regional funds, global funds are underweight. So my sense of the crude is that if crude does
05:55 not touch beyond 90 or 100, we are okay. If you look at the long history,
06:03 crude is a non-event till 80, 85. It doesn't matter. But if it becomes say 9,500,
06:11 then other things don't matter, how good they are. So it becomes a binary event,
06:17 which overshadows a lot of things. And hence I said that, well, we are looking at crude,
06:23 at least the HLTC view is that crude is unlikely to go to that level. And next year, we're looking
06:28 at even softer crude. But if some event were to happen that crude suddenly reaches or appears to
06:34 be reaching 9,500, then you would see markets snapping back as a snap reaction. And flows tend
06:41 to sort of preempt that and become negative. Second could be if inflation were to go out of
06:48 control suddenly and seems like, and then what happens is market preempts that and flow can turn
06:54 negative. So inflation, crude, and also maybe protracted US recession, you could worry about.
07:01 But if these two factors are okay, you can tolerate that. Rest, every other scenario in
07:07 Goldilocks seems okay to me. Okay. What about central banking action
07:12 wedged out here? Because we talk about March, March was around the time when the commentary
07:18 of the big four central banks kind of turned a bit, if I'm not wrong. And off late we've seen,
07:24 maybe not fully hawkish, but certainly not dovish commentary. Does that play a part in this,
07:32 in this whole theory of flows into EMs in India? It does. I think it is a great question. Because
07:40 look at, I mean, that gets summarized in US bondage, right? Any action, for example,
07:46 or any anticipation by market. So bond yields are today at about 3.9%. It's come down from 4%
07:53 just a while back. So my sense is that it summarizes those expectations. And I think
07:58 we can't rule out one hike may happen. And some commentary is still not dovish enough.
08:05 But it's fair to say that market has discounted that in its own expectation. And hence,
08:12 this is not a major risk if that commentary sort of remains in this range. While inflation,
08:19 for example, domestically is a thing to watch out for, what it means for even central bank
08:25 action here, for example, that I would leave it to economists to obviously comment upon.
08:30 But at the same time, this is something that is worth keeping an eye on. Given the July inflation
08:37 would be inching up further from May, sorry, June, June was higher than May and July could
08:43 be higher than June. So in some sense, that situation needs to be monitored.
08:49 Okay. So would there be something in the global central banking commentary that would make you
09:01 change your current view? Everything else remaining constant? Can that alter the view
09:07 of inflows in any fashion? Or you believe that is not as important as some of the other two
09:13 factors that you spoke about? I think those are largely discounted risk. Any stock change from
09:20 that seems unlikely right now. From India's point of view, given the India's growth outlook is quite
09:27 standout, earning outlook is very good and India's structural appeal is on the right. Many
09:32 funds are just waking up to invest in India. So it's a new form of attractiveness that India has
09:39 sort of seen. So my sense is that in this environment, any correction could be very
09:44 shallow and probably many investors will use opportunities such as these to buy into India,
09:50 rather than worry that more sell-off is coming. I think the bullish construct has certain legs to it.
09:57 Unless you see major downgrades or earnings, etc. for inflation or some other macro things going
10:05 wrong, which doesn't seem likely, you could see intermittent some consolidation. Every bull run,
10:12 for example, has intermittent phases of consolidation. Bull run is not every month
10:16 market going down. It goes up three months, then it corrects one month, goes up three months. But
10:22 if you analyze the last past bull run, you'll realize that those phases have generally
10:29 three months rise to one month fall, three months rise to one month fall. Those phases
10:35 aggregate to become a bull run. So we should not worry about smaller consolidation. I think
10:41 if general construct remains like this, I think it's a Goldilocks scenario for India playing out
10:48 and we are in the middle of it. I heard you mention about how a lot of funds
10:55 are waiting to get into India. It must be a good time to be an India equity strategist because
11:00 earnings are looking okay, India is being favored and people want to get into India.
11:04 What are clients telling you, both existing clients who have money into India and also some
11:11 that you might be meeting, might be prospective clients who might want to be getting into India?
11:16 What are the conversations like? I think the bigger conversation is a uniform acceptance that
11:23 India is a great structural market, number one. And also macro is stable and this growing
11:30 acceptance that it is structurally appeal of India. Third, there's a grudging bemoaning of
11:40 the fact that valuation look always out of reach and something that people want a bit of a
11:47 consolidation phase to emerge and they buy into it. So everybody would definitely, whoever I speak
11:53 with, tend to seek comfort in valuation, very rightly so because we've seen the period of
11:59 2022 and 21 successes where market corrected and people want to avoid that level of
12:06 bullishness that you're buying growth at any price. So market learns quickly and I think
12:11 that's where the worries are we in that zone where you are paying already excessive value.
12:15 So market is pusher on paying too much of premium, but yet looking selectively for the opportunity.
12:23 My sense is that this year would be largely earnings driven. And why do I say so? If you
12:31 analyze past cycles, market breaks when it reaches 83%. When the market is going to a drop,
12:40 the break falls about 5 to 10%. At the peak of bull run that touches about 98%.
12:46 We are at about 83 right now. What does 83 tell? 83 tells you that I can sustain this phase for
12:55 at least a year if earnings are really good. But at this break, multiple expansion is very diminished.
13:01 So market gains incrementally becomes very earnings led. Resilience of earnings, downgrade should not
13:08 happen. Market doesn't tolerate earnings downgrade at this level. So one must avoid those scenarios
13:15 where you're buying prospective earnings which could be subject to downgrade. So that tolerance
13:22 becomes low. That's the market cycle teaching. So in some sense, we can tolerate this spread,
13:28 we can tolerate this multiple, we can tolerate this flow, provided India delivers on earnings
13:34 expectation. I will get to earnings as well, but one last question on flows related. You note in
13:42 your report that you have written as well, that even if there are moderate FI outflows,
13:48 the DII flows would kind of cushion against the volatility. Now, my want of understanding is,
13:54 based on how you analyze past cycles, based on your analysis of both DII and FII flows,
14:03 as well as money waiting on the sidelines, are the things remaining constant? If we were to get
14:08 into a corrective mode, at what levels would you be comfortable telling your clients that, okay,
14:14 I'm telling you, come in and start putting in your money?
14:17 Well, we are regionally overweight on India, on a gem perspective, we are overweight. India is
14:25 one of our favorite markets for HSBC. So that is a given, we are telling clients that we are
14:29 overweight on India. Number one. Number two is basically your question is that, how do we
14:36 basically go into the, sorry, what was your second bit that you?
14:42 My question is, if we are to get into a corrective mode, what levels or what valuations
14:48 would you believe you will be comfortable telling your clients that you are confident of putting
14:54 their money to work? Oh, okay. See, look, we are comfortable,
14:58 that's the reason we are overweight. The only thing is that I can share the benchmark. For example,
15:03 in a trough year, in a peak of the bearish run, peak of the crisis year, valuations are 11 to 12
15:11 in India, had not fallen below that. In a normal bearish year, India is about 16, 17.
15:21 In a typical normal cycle, we are 18, we are at 20. So, if you invest, invent a very bearish year,
15:33 we will fall to 16, 17. It's a no-brainer if no crisis is coming. If 16, 17 valuation, but today,
15:40 I would say probably it could be a larger concern for a sustained bull run. It's 20,
15:46 then I'm looking for more earning resilience, because it can mean that there are pockets of
15:52 stretches one must avoid. And hence, the market, even if it's in bull run, would seek sectors and
15:59 rotate risk where the underperformance is high and earnings could be good.
16:03 Got it. So, what fits the bill? I mean, because there are some which have gone beyond market-wide
16:10 valuations as well, and beyond their historical valuations, never mind the earnings. So,
16:14 I'm just trying to understand, could it happen that the market stays flat, but there could be
16:19 rotation happening and some undervalued sectors right now come to the fore, because there might
16:24 be earnings there, but the valuations might be benign. Right. So, we have many cases of the
16:30 point. So, there are two dimensions where you can look at all the sectors, how optimistic the
16:34 investors are, how positive the business dynamics are. Ideally, you want to be buying when investors
16:41 are pessimistic and dynamics are positive. Or at least dynamics are positive and investors
16:49 are optimistic, but I can still see momentum going on. But that's a risk of market, where market
16:55 wants to take minimum risk. What if market is a risk on? What if the market wants to play the
17:01 cycle which has not yet arrived? Then there's a third quadrant, which is investors are bearish,
17:07 market dynamics are also negative. There, outperformance can come from sectors which
17:13 are currently doing very bad. For example, I would place IT in that bucket. In our framework,
17:19 IT stays in that quadrant, where business dynamics are obviously negative, but investors are also
17:25 pessimistic. In the 19 billion flows that we've seen from April, only sector that has seen major
17:33 outflows are still IT. So, in some sense, IT underweights have risen. And at some stage,
17:40 where the valuation has become very reasonable, and dynamics are bottomed out, and other sectors
17:47 are on the lot, I wouldn't be surprised some amount of rotation taking in seeking such sectors. I'm
17:53 not saying IT, but I'm just saying that those have consistently performed in the past, and
17:58 they are now well positioned to attract risk on flows of some sort. I hope that answers the
18:04 question. So, financials look okay to us in terms of as a positioning, and even selected consumer
18:13 discretionary, consumer staples, we believe, are going towards the last leg of rallying,
18:18 although the margin expansions are largely reflected in stock valuation,
18:24 in some sense, but our earnings outlook seems to be okay.
18:26 Okay, sorry, did I miss you saying banks? And I'm wondering what your thoughts on banks is,
18:33 not NBFCs, just banks? Financials, we largely like private banks, to be honest.
18:42 And that's where our team, basically are focused on largely, and we've recently also upgraded
18:49 some names in the NBFC space as well. Got it. What about underperformance? You mentioned
18:57 IT that at some point of time, who knows, there might be rotation there. There are a few laggard
19:04 sectors which have started to now see fancy. I mean, the month of July has seen Pharma do
19:09 amazingly well. For the last series, Pharma was the best gainer. There are a couple of other
19:13 pockets which are coming to the fore. Any interest there? See, what I'm saying is, those sectors are
19:19 definitely case in point, where when market is in a risk form, market wants to believe and play the
19:25 improvement cycle. Although the business dynamic in Pharma are yet to show up, right? But at the
19:30 same time, any news flow which suggests that there's a shortage of drugs or something like
19:34 that, because underperformance in the past, things can rally a lot, you know, in some sense.
19:40 So those are the sectors definitely should be on the radar screen. And as the business dynamics
19:45 improve, they would go to the first quadrant where investors are negative, business dynamics are
19:49 improved. Got it. Which is an outperformance quadrant. Okay, get it. One final question,
19:58 and that is, one of your peers happened to mention this in an off-air chat about how,
20:07 while they are constructive India, they are closely watching out for announcements from China,
20:12 because China is just so cheap that if they do announce a stimulus, then FIs could well prefer
20:17 what they did until March, which is sell India and buy China. Is that a fear? Because you mentioned,
20:23 some mentioned around how it's not a zero-sum with India on average, would love to understand more.
20:28 So, for that, we must understand short and long cycle, right? In the short run,
20:35 India rallied because China was going out of favor, recovery was below expectations.
20:42 Why it underperformed in the first, for example, quarter was because China was supposed to open up
20:48 and also the valuations were very excessive and there was a slowdown. And so many things,
20:55 factors came together in India, sort of, you know, the sell-off that we saw in the first three months.
21:01 Now, if China were to do a macro surprise or a stimulus, there is a definite, you know,
21:08 risk of some outflow, doubtless. But would it be very deep? My sense is that's because China has
21:16 seen more tactical unless some decisive structural attractiveness and performance, you know,
21:22 become visible. So, in some sense, some rotation may happen, but not a whole lot of weighty.
21:30 Second is basically, if you look at the long range cycle, China and India flows are not
21:35 going to get through this. And then most of the year, both the markets have basically gained
21:41 flow at the same time. It is not, if you were to buy China, you have to be underweight India.
21:46 That is not the case over the long term cycle. And thirdly, basically, I would probably think that
21:52 so long as India's earnings are okay, valuation is not out of whack, right? If valuation was,
21:57 say, 23, 24, and then there was a case that deeper correction is needed and let that be an excuse.
22:03 Our view is that while China recovery is a bit of a risk, but it would probably be very shallow risk.
22:10 Okay, point well taken. Amit, thank you. It is a lovely note to read. And thank you for
22:19 selecting some parts of it and talking to us about it.
22:22 We hope it's even better than that for India. But thanks for taking the time out.
22:27 Thank you so much, Neeraj, for having me here. Thanks a lot.
22:30 It was a pleasure. It was entirely ours. And viewers, thanks for tuning in.
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