- Will rising bond yields push flow out of equities?
- Will inflows into China cut into India's share?
HSBC's Herald van der Linde shares views on this and more.
- Will inflows into China cut into India's share?
HSBC's Herald van der Linde shares views on this and more.
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TVTranscript
00:00Hello and welcome. You're watching Talking Point and joining us today is a very special
00:15guest, Haril Vander Linde, Head of Asia Equity Strategy at HSBC. Haril, thank you very much.
00:20It's always great talking to you and it doesn't get better at the start of a brand new month,
00:24a month ahead of elections locally. Lots of global and local factors to talk about. But
00:30I'll start with the most important one this week and that is the FOMC meet. Bets are on
00:36whether or not there will be a rate cut at all in F5 in this calendar year. You want
00:41to tell me what the possibility of a no Fed rate cut in the current calendar year, considering
00:46the kind of economic data that we've been seeing coming out of the US?
00:50Yeah, well, good to talk to you again, Samina. The Fed is extremely important for Asian equities.
00:56And you're right. We started this year with the market saying, hey, maybe it could be as many as
01:01five. Some banks are even talking about several rate cuts this year. That's really being pushed
01:06out of the window. And now some people are talking about maybe rate hikes even this year. I think
01:11that might be a bit too early to judge. But clearly, some of the inflation numbers have
01:16moved a bit in the opposite direction than at the beginning of the year. And it looks like we
01:22might not even maybe even get rate cuts this year. But for the moment, our base case is still that
01:27there will be rate cuts coming through. But clearly, there's risk to that to a particular
01:31view unfolding. And the market is repricing that.
01:36Harold, interestingly, in the month of April, we've seen FPIs actually sell out of India for
01:41the very first time in the year so far. And this is not just equities, it's debt as well. Do you feel
01:47like rising bond yields could mean markets globally, and India in specific could see outflows
01:55from the US investors?
01:58Yeah, well, I think there's two things going on. It's something on China, and what happens
02:05globally. So globally, yeah, interest rates and bond yields in the US have gone up. So it makes a
02:10little bit more sense to put money into the US market again, I'm really talking about US money
02:14markets and putting in deposits, because there you get four and a half, maybe 5% on certain
02:19deposits again. So I think we've seen money move a little bit out of equities in general, all around
02:24the world, and India is no exception. And so I'm not overly worried about that. That's, I think,
02:32sort of a near term sort of consideration for India.
02:37And let's talk about China, because I know you've been tracking that very closely. And the last time
02:41we spoke, you were constructive on China, but I believe you are even more constructive on China
02:46today. The yen is at a record low, US bond yields are rising, India may or may not be seeing FPIs
02:53come in lock, stock and barrel, and that could do have to do with a local factor such as the
02:57elections. Where does China stand and how much of China's potential inflow could eat into India's
03:04buy?
03:06Well, before China, very quickly, India, because we do really like India, but it's just a market
03:12that's performed so well, it's rather expensive. So we said, maybe we should wait until the slightly
03:17better time. But it's a market that we effectively still like. China's almost the opposite. China's
03:22got an enormous amount of challenges to deal with that are well presented in what you guys have
03:26talked about it as well, property, economic growth, and all these sort of things. But we've seen such
03:31a massive sell off, that now China, a lot of people say, hey, maybe, maybe it is a bit overdone.
03:36And it comes at a time where India is expensive. And you see that there's some strange things going
03:42on with the yen. I mean, I'm not quite sure what happened this morning, exactly. It looks a little
03:46bit awesome at the moment. But you see that the Japanese stock market is not really responding to
03:50that as it did in the past, it's not rallying much higher. So I have the impression that people are
03:55reallocating some money from Japan into China, not so much from India, really, but from Japan
04:02into China. So China, the interest in China is really picking up.
04:07Are you buying more China than India? Or recommending more buying in China than India?
04:13At the moment, actually, we like both markets. But the way we like them is very different. China,
04:18I see, is a market that might do well. And in the near term, it's oversold. It's a sort of a
04:22tactical adjustment that we take to China. So for the moment, I think it will probably do a bit
04:27better than India. But if you ask me, hey, 12 or 24 months out, which market do I prefer? I would
04:35prefer India. So because India is a very different story. That's why I think we should not see these
04:40markets that you sell one and go to the other one. These are like apples and oranges. They're
04:44really different. And they give you a very different sort of exposure. India gives you
04:49nice sort of long-term growth story, very, very multiple growth drivers, not a lot of risk on
04:55growth, but valuations are high. And China is the opposite. A lot of risk on growth, but valuations
05:00are really low. That's why I think you should probably have both, actually, in your portfolio
05:03at the moment. They've become mutually exclusive in the recent past. And that's interesting,
05:10right? Because it was always an India-China play, which has now changed. Let's talk about
05:16local factors, because I think back home, the focus largely is on what's happening on the
05:22election front. Do you think that the markets, do you think yourself included,
05:27is focusing more on policy continuity than actually a general election result?
05:33I think what we've seen at the beginning, since the beginning of the year, there's been a lot of
05:37elections coming through. Indonesia, Taiwan has had elections. India is now in the midst of it.
05:42It seems like the market expectation of continuity has worked in Taiwan, has worked in
05:50Indonesia. It seems like it's going to work in India as well. So the market is assuming,
05:55most likely, no real change in the government party. Therefore, continuation of policies,
06:02that's considered to be kind of positive at the moment. So it's being brushed aside for the
06:09moment that there is any particular issue in equities. So most of the conversations we have
06:14about India is about valuations. It's about the growth. It's about what do individual companies
06:19do and not so much about, oh, will there be a shift in policies because maybe a new
06:25prime minister might come in or something like that.
06:27Harilda, and that, I need some more perspective on. Valuations of all equity cohorts and almost
06:34all sectors appear expensive, even by the most optimistic in long-term investors into India.
06:42Maybe the large gap not as expensive as some of those broader market sector themes that we've
06:47been seeing. Is there anything that looks compelling to you, keeping valuations in mind at this stage?
06:54Well, you know, with India, the thing is that Indian companies always belong to,
06:59they belong to the most profitable companies on planet Earth. So you have companies in India that
07:04generate enormous amounts of profits, don't have to invest a lot. It's a textbook sort of companies
07:09that you want to have. And that explains partially the high valuations. So one thing we just have to
07:14accept is it's like, I don't know, it's like maybe a handbag. You have cheap handbags and you get
07:18expensive handbags, but you like the expensive one because you get better quality. And so it
07:22is with Indian companies as well. So we just have to pay for that. Irrespective of that,
07:27it doesn't mean that it's at the moment really expensive. But if you dive a little bit deeper
07:32in the market, and you guys have talked about this as well, it's the smaller mid-caps are really
07:36rallying. So in the large cap space, there is better value. That's why banks and selected
07:41consumer names, I think there is still reasonable value to be found, but you have to be much more
07:45selective in India. That's absolutely the case at the moment. And I want to talk about one space
07:50that FIs historically have always liked, and that's the banking space in India. Do you see
07:55a further drop in bank deposits, considering the increasing flow of money towards capital markets,
08:01equities, mutual funds, to list them all? And what does that mean in terms of outlook for Indian
08:06banks and simultaneously for non-banking stocks? So capital market players, the exchanges, the
08:11mutual funds, the guys are betting on private banking. How does that look to you as a whole
08:16pack, banking and non-banking? Yeah. So what I think, what we see in India, we see it in a couple
08:23of other countries as well. Indonesia, early signs, Thailand a little bit, we've seen it in
08:28in Korea in the past, is actually really powerful. You have a lot of people that are having savings
08:34and they want to reallocate. Normally, they're putting it into the banking system and the banks
08:38would lend it out. But now they're actually putting it into capital markets and bonds and
08:43equities and these sort of things. And that's a re-channeling of savings into investments
08:48domestically. That's really powerful. That's really good for an overall economy. So that's
08:53good for growth. But yeah, for the banks, that means that maybe they have a little bit less on
08:57the deposit side and they need to get the deposits in. They have to raise deposit rates. That's not
09:01so good for their margins. But given that the overall growth remains pretty robust, I'm not
09:07overly worried about this. What we see in India is really a healthy sort of re-channeling of savings
09:14into productive assets at the moment that can continue for some time. And we know from other
09:20countries it can be quite powerful to generate growth. Harald, I don't know whether this is a
09:26theme that you've tracked in India and it seems like DI is definitely like this sector and it
09:32seems like a lot of it is election play. It's built up under performance of decades together
09:36that's helping the defence sector to say the least. And so these defence stocks are trading
09:41at very high valuations. Do you have faith on this multi-year defence story that's playing
09:47out in India? And if yes, are you betting big on it at this stage? Well, the defence industry
09:54around the world is in a very different place than it was five or ten years ago. We have
09:59intensifying rivalry between great powers, and India is one of them, around the world. So we've
10:04seen defence stocks move around this from China, Japan, to India, to Europe, everywhere, to be
10:09honest. And this is something that will probably continue to be part of our lives. Intensifying
10:16rivalry between new countries, not even the right word anymore, right, but
10:22countries that become new players on the geopolitical stage. My country, the Netherlands,
10:30was a real big player 400 years ago, 300 years ago. We're nowhere now, right? So these things
10:36come and go. And that new reality puts a lot of life into new industries and defence is one of
10:43them. But also, for example, the tech industries that supply the chips or the cameras and all these
10:48other things, and the memory and the processing power to defence. So there's a lot of these
10:54industries that have structural stories involved. From here and there, these stocks will move on
10:59near-term considerations, but in the longer run, yeah, those are sectors that will continue to see
11:05growth. It's up to us to figure out how you benefit from that. Right, just extending that
11:10conversation into other sectors and the government's focus, sir. Would you bet on
11:14riding the Capex theme, considering the government's increased focus on infrastructure spending, Harold?
11:21Yeah, so I slightly have a different view on that. So I travelled in Tamil Nadu a couple of
11:28months ago, and yes, the infrastructure is being built out, but it's still early days. So you go
11:33from A to B, and you're a little bit on the highway, then you've got to get off the highway,
11:37through the paddy fields, then you're on the highway again, and then you're down on some
11:40dirt roads through the paddy fields, and then there's a bit of highway. So they're building it
11:43out, and it's not connected yet, but give it two, three years' time, it will be connected.
11:48And then the benefits from that are that you have a connection between A and B. So trade between A
11:53and B will go up, more transport, there will be hotels, there will be property prices will go up.
11:59So very often, I think the way to play these sort of themes is actually buying consumer companies,
12:05or maybe companies that indirectly benefit from it over the long run, and be careful with the
12:10companies that might have a big order now, but maybe not in two years' time. So while the attention
12:17very often is then straight on, oh, the construction companies will benefit from this, I'd like to look
12:21at the kind of longer lasting beneficiaries of this. And it could be a hotel, and it could be
12:27a company that convenience stores, that just benefit from improved infrastructure around India.
12:33Harald, for India, what do you think the theme is? Over the last decade or so, it's always been about
12:39made in India. Suddenly, the bias could be changing now to make for India. Where would you,
12:46if I had to ask you to put your money on one of these, where would it be? Make for India or make
12:51in India? Well, it looks to me, it's a little bit of both, right? And I'm chickening out a little
12:59bit here, but India has never been a manufacturing powerhouse as China has been in the past.
13:04It was a services powerhouse, right? But not so much a manufacturing, but that seems to be changing.
13:10And that lifts the domestic consumer demand. So what we've seen in China is happening in India,
13:15in that sense as well. So you want to be in both areas. But what I really think will be an exciting
13:21industry is not AI or robotics or some of the manufacturing. It's actually because a lot of
13:27people, when they have another job and they can make more money, they invest that money. That's
13:32what we just spoke about. So you're going to have Indians buying Indian assets. India buys India,
13:38if you want to put it like that. It's that rechanneling of savings that's really good for
13:43stock markets, but also good for wealth management. That's really an interesting
13:47sort of long-term growth driver as well. India will get richer and will become a bigger investment,
13:53source of investments as well. That, I think, is an interesting growth industry.
13:57You can buy more homes, and if yes, then I think real estate also goes on that list, right?
14:03Yeah, for example, real estate could be brokerages, could be wealth managers,
14:07and these sort of things. It could also be, for example, maybe a longer run. It means that
14:12interest rates of the longer run can come down. So that's good for bonds. So there's many ways to
14:17invest in that particular theme. Also, premiumization. We hear about that a
14:21lot, and we've seen that in a few numbers. Staples in the consumption space haven't seen
14:25the sort of traction, premiumization, or aspirational companies have seen. A lot of
14:30those e-commerce names, right? A Nika, a Zomato, I'm calling them aspirational because they have
14:36changed the way Indians or India really deals with discretionary spending. Do you feel like
14:42that's a theme you'd like over Staples? Because there are only that many toothbrushes and
14:47toothpaste one can buy. That's right, but there's still a lot of Indians who would like to
14:52buy that. So I think that is happening, but it will happen very differently than, for example,
14:58what we've seen in China. In China, a lot of families were really small. You had a one-child
15:02policy, right? So you had one child and very often two people in a family that worked. So you have
15:10for one salary, only three people, and actually it's two salaries that very often they brought in.
15:14In India, that's not the case. The men works very often, the ladies stay a little bit more at home,
15:19female labor participation rates are lower, and families and households are bigger. So the scope
15:23for discretionary spending will improve in India, so the premiumization will be there, but I think
15:28it will be a very slow process in India. And that's good if you're in a business because that
15:32means you have more time to build out your business. So I think the dynamic of that,
15:37it will unfold, that premiumization, but very differently than what we've seen in other parts
15:41of the world, very uniquely Indian, I suspect. Does that mean you want to move away from staples?
15:47I don't really think so, but do you want to, I think the key actually is here, not so much
15:52discretionary staples, the key is distribution. Can you get your product, if the Indians want to
15:57buy it, can you get that all across India? And being able to distribute that across all these
16:02different parts of India that are so incredibly, India is so interesting, so diverse, if you can
16:10get that distribution right to reach all these people, that will be the secret source, I would
16:15say, to success for Indian corporates. I want to talk about a sector again that's done positive
16:22returns for most part of the last decade, and those are IT stocks. Again, something that a lot
16:27of people betting on India have usually liked. But the outlook currently seems rather uninspiring,
16:34given the delayed rate cut from the US, political outcomes that the markets worldwide are
16:41anticipating, through in-gen AI, so many moving parts, right? How do you feel about the IT stocks?
16:49Do you feel like they could be the dark horses of FI25? Dark horses, maybe. I mean, there's two
16:57things. It's one of India's success stories, the IT companies, right? So it's a fantastic story.
17:04And the Indian companies have really moved on from just call centers to become a global
17:09provider of IT service. Some banks have more people working now in India than in their home
17:16country. So that's been a real motor success story, and I don't think that will be derailed
17:20soon. In addition to that, it's a sort of US dollar exposure, if the rupee would weaken,
17:26you benefit from that as well. So that's one story. Then you have a near-term story, which is,
17:30well, most likely with high interest rates, the US is supposed to weaken. We've been talking about
17:35this upcoming recession for some time. We haven't seen it yet, but that could weaken. Europe is
17:40weakening. So mainly near-term, the order flow and the demand for that will be curtailed. That's bad,
17:46but the longer-term story, the positioning that India has really carved out in this particular
17:51sector is not just unique, but it's really remarkable. So is it a sector you want to have
17:57long-term exposure to? Yes. But if the US numbers come out and look like GDP is really rolling over
18:03and is getting weaker, do you then want to have exposure to it? Maybe not. So it's more of a
18:09near-term consideration, I would think about that. You know, Harold, you indicated a couple of times
18:13that Indian markets have always been expensive, but we do look a little more expensive than our
18:18historical average. I want to understand from you, what in your opinion is a risk that you're
18:24watching out for, for Indian equity markets? Or put another way, what do you think could lead to
18:31a correction on Indian equities? Would it be price or time bound? And the reason I ask you this is
18:38because if incremental flows need to start coming in lock, stock and barrel, we would need a
18:43correction either price-wise or time-wise. Yeah. I think there's a couple of risks that we need to
18:49keep a close eye on, but none of them keeps me awake at night, so to say. First of all,
18:55you're an importing country. You need to import energy and these sort of things. If oil prices
19:00would shoot up, that would not be good for India. And typically, oil prices, if they move towards
19:05$100, people don't care about it. They go over $100, whoops, everybody cares about. So that's
19:09one thing. I think a second risk is that we now see a lot of individual growth drivers,
19:16investment flows, consumption flows, and these sort of things. That's good. But if for some
19:20reason, that would start to fade. Some of the growth that has come out of India is because
19:26credit costs have come down. They've cleaned up balance sheets, the banks. Now, that's really good,
19:31allows them to expand credit, give out credit, but that will eventually come to a halt. So that's a
19:37risk factor as well. So if the earnings growth numbers are going to disappoint, that's a second
19:41risk factor that I would be looking at. And then there would be risks that maybe India can't really
19:48control. That would be what happens globally with the global macro. If, for example, we see
19:52a complete reversal in either, say, the US, interest rates in the US go up, and then the bond
19:59yields shut up and stock markets go down, that would not be good for any stock market, India
20:03included. Or, what we just spoke about, that China is suddenly becoming so much stronger that
20:10it actually does suck up money, not just from Japan, but from other parts of the region as well.
20:15And that would be Indian. As I mentioned, I don't think that's a near-term risk, but these are some
20:18of the risks that I would be thinking of when it comes to Indian stocks. Harald, what percentage of
20:24your India allocation is still on the sidelines? Do you recommend increasing cash holdings with
20:29regard to Indian equity markets? And also, taking profit at higher levels at this stage,
20:35what's on your mind? No, I mean, if I think about cash holdings, I think about what is the direction
20:42of US bond yields. And I actually think they're going to come down, so we like equities. So I
20:46don't want to have a lot of cash, you want to be in equities. And in that sense, you want to be in
20:51Asian equities as well. I think China really has a bit of momentum developing, so I would be looking
20:56there. For India, would I put cash on the side? Probably not, to be honest. Would I buy more?
21:03Well, we're overweight, so we like that exposure. But I think the momentum in the near term could
21:08come from China. So the additional money I have, I would probably, or we see that people putting
21:13that into Chinese equities at the moment. But I wouldn't go necessarily into cash. I think it's
21:19very dangerous to bet against the Indian equity story if you have such good earnings growth coming
21:24through. So we'd like to stay fully invested in that sense. To stay invested, but it could
21:29be a little more stable and slower in terms of growth for FY25. What sort of a number in terms
21:38of growth or returns are you expecting for FY25 for Indian equity markets? Well, I think consensus
21:45is looking for something well over 20%, 24 out of the top of my head. So there's pretty decent growth
21:50coming in. That might prove a little bit too much on the high side. I think India might be slowing a
21:55little bit from last year, but maybe I'm wrong. But I suspect if we can run something between 15%
22:02to 20%, that would already be pretty good. So I'm guessing we're probably ending up in the high teens,
22:09but consensus at the moment is looking for a little bit higher numbers. And I hope to be proven
22:13wrong in that sense, because, I mean, growth is good for equities. And this is why we don't want
22:17to be engaged. We want to remain fully invested, because the risk is on the upside in that sense.
22:24I'm so glad you say that, because anyone who's concerned about it being a negative
22:30year of returns for the markets will take a sigh of breath. Just one quick one,
22:36and I want to talk to you about gold, because what's happening in gold is also very interesting.
22:40It's very rare that you see risk-on and risk-off assets play out well at the same time. Gold is
22:47at a strong run from the start of this year. I know geopolitical stress could be one key driver
22:53for gold prices, but how are you approaching gold? And are you looking at gold's rally
22:58as a cue to what lies ahead for risk assets in the next couple of months?
23:04No, to be honest, I don't really look at gold in that sense. Yes, I've noticed gold is moving
23:09higher. I think there's a variety of factors to it that you already mentioned, geopolitical
23:13considerations, maybe bond yields coming off, so therefore, on the margin, why would you keep
23:19your money in a deposit? You put it somewhere else. Gold is an alternative. From what I understand,
23:25there's been good buying in China of gold as well, because if you're Chinese, do you want to buy
23:30property? Maybe, of course, the stock market has not done very well, so people are looking maybe
23:35for something else. Gold demand might have picked up for that particular reason as well.
23:39A lot of these moving parts, but if I really think about, hey, what should I do, for example,
23:44in Indian equities, gold is something I look for, because India is an importer of gold,
23:50but I really look at bond yields. I really look at the growth profile in India. The stuff that
23:55we've just spoken about earlier on, the FOMC, the Fed, what are they doing? What is the earnings
24:00growth in India? That, for me, are the real key drivers, and gold is something that I put then
24:06on the side. I don't let them determine what I do in equities.
24:10Right, Harold. As always, it's a pleasure having you on the show and talking to you
24:14about your perspective on India and the rest of the world. We'll hopefully see you soon again,
24:18and have a good week.