Arvind Sanger On The China Stimulus & If It Can Revive Chinese Economy I Why Hang Seng Fell Today
Category
🗞
NewsTranscript
00:00Karwin Sangar, this question, is managing partner at Geosphere Capital with us on the
00:04show today.
00:05Karwin, thanks for waiting by and thanks for joining in today.
00:07Really good talking to you this morning and this evening, your time.
00:11How do you look at the setup now because it seems that the two temporary positive points
00:17have turned to be pain points, yields, crude prices above 80, India is kind of being singled
00:24out for punishment at least in trade yesterday.
00:27How do you look at the setup from a global perspective and what happens to India?
00:31Well, look, India benefited from a lot of factors coming together.
00:38One was, you know, Tina, there is no alternative, right?
00:42India was the only game in town in terms of major emerging markets.
00:48And second was, you know, I guess a benign set of circumstances on a lot of fronts like
00:54you talked about, crude oil, interest rates were heading down, Fed was cutting rates,
01:00everything was going well.
01:02So now you've had a few things upset the apple cart.
01:04Obviously, you had some negative surprise on U.S. growth, which suggests negative in
01:10the sense that it was, you know, stronger than expected employment numbers, which means
01:16that the easy glide path to Fed cutting another, you know, 75 to 100 basis points in the next
01:24two meetings is no longer that straightforward.
01:27So the cuts might be less.
01:29And don't forget China, right?
01:31China has been a dog in terms of a market for the last two years plus.
01:38And now we've seen some breath of life coming back into the Chinese market because of actions
01:43by the Chinese Central Bank and the Chinese Politburo.
01:46And all of these incentives are causing investors to realize that China's valuations are less
01:53than one third of Indian valuation in terms of valuations in many parts of the market.
02:00And therefore, there has been some, you know, playing the laggard trade.
02:06So I think these factors have come together and then, you know, oil going up to 80 is
02:11not a big risk only for India.
02:13It's a risk for China.
02:14It's a risk for other oil importers.
02:15So I wouldn't put that as the singular reason.
02:19But I think, you know, there's a little bit of a risk of going off in global markets because
02:23of uncertainty about what might come out of the Middle East.
02:25So that's a third added element, if I may add.
02:30So hi, Arvind, Tamanna here and good morning to you.
02:34In the midst of all of this, how is India positioned and how is India looking?
02:38I mean, we went over an interesting CLSA note yesterday, which talked about going overweight
02:45on China and the cost of those funds are coming from India.
02:49Has it become, in a sense, for a lot of global funds in India, China, binary?
02:54And right now, China is looking more attractive?
02:58Well, look, you can take a short term view and you can take a long term view.
03:04In my opinion, China is a trade.
03:07India is an investment.
03:08So let's separate that in terms of the long term perspective.
03:13But having said that, clearly, India's valuations have been at nosebleed for a while and no
03:19tree ever grows to the sky.
03:21And India is no exception.
03:23You know, when people talk about this time is different, you know, that's nonsense.
03:26That's been said all over the years in several markets at the top of all markets.
03:31So, you know, India is not something that's going to walk on water.
03:36And the valuations need to reflect reality that Indian growth is good.
03:39But you know, seven to eight percent GDP growth is not earth shattering.
03:44So China, with its valuation, yes, we'll see some funds low and probably deservedly so
03:49in the short term.
03:50But longer term investors, once we get stabilization and some valuation retrenchment to reasonable,
03:57somewhat more reasonable levels in India, then people realize that from a long term
04:02standpoint, the India growth story has solid underpinnings.
04:08But we have to watch.
04:09I mean, let's be clear.
04:10We have a quarterly earnings coming up here for the September quarter, India's fiscal
04:15second quarter.
04:16Let's see how the earnings do.
04:17There are, you know, big signs.
04:20So I'd like to see the short term trajectory confirm what we think is happening in the
04:26medium and long term, which is a solid earnings growth story, which we're reasonably confident
04:31about.
04:33But the valuation has moved up so much that even with this pullback, it's not like India
04:36has become a screaming buy right now.
04:38That's the question, really.
04:39I heard you say that to more reasonable levels.
04:41So is that more reasonable level, three, four percent away from here in the large caps?
04:45And in that period, if the markets were to retrace to those levels, will mid caps and
04:50small caps suffer more?
04:53They will and they probably should because the valuations have gotten extremely excessive
04:57and clearly, you know, SEBI is getting into the act in terms of some of the actions they've
05:02taken to try to reduce the speculative fervor in the mid and small caps.
05:08So, yes, we are interested across the cap spectrum and we'd be more interested in mid
05:14caps were, you know, maybe 10, 15 percent cheaper.
05:17I think that would cause us to be a little more interested in things from a valuation
05:22standpoint.
05:23No, we are not at valuations which make India a rip roaring buy, but we are moving in the
05:29right direction.
05:30You know, Arvind, you made that interesting point about a trade versus an investment.
05:37When does that paradigm shift again?
05:40I mean, you're seeing some statements coming out of China right now, and that's looking
05:43very, very rocky for the Chinese market and the Hang Seng reacting quite violently even
05:48as we speak.
05:50Does that pivot take place sooner than expected?
05:54Does the China sort of let's get back to China mood change sooner than expected?
06:01That's that's so hard to call because it depends on what China's next policy measures are and
06:07how far they're willing to go.
06:09I remain skeptical that China can fundamentally alter the trajectory of their problems, whether
06:17they are, you know, overinvestment in real estate, which is now going away, whether they
06:21are demographic challenges or whether they are the fact that President Xi doesn't fundamentally
06:26believe in letting the private sector take leadership and move the economy forward.
06:32So all of those factors, none of those have gone away.
06:35The question is how much, you know, how much are they willing to do in the short term to
06:39turn their economic trajectory around?
06:42And I don't know the answer as to how soon it'll become apparent that maybe China's efforts
06:48are more half-hearted or will they go further than what I skeptically expect them to do.
06:53So that's, you know, that's that's that's in Chinese policymakers' hands.
06:58But my sense is, even if they continue to do more in the next two or three months, it'll
07:02become apparent that it's not going to change the fundamental trajectory, whether that'll
07:06become true in the next, whether that'll become apparent in the next one or two weeks.
07:10I don't know.
07:11Nothing ever goes in a straight line and China is not going to go in a straight line up.
07:16But I suspect we still have maybe a few weeks to run off the China, you know, kind of hope trade.
07:24OK, so the China hope trade continues for some time, but bigger picture here.
07:30Arvind, let me come back to the US markets just for a bit.
07:35The celebrations on Friday evaporated fairly quickly.
07:39The Iran deal is now hardening.
07:41Are you seeing that continuing?
07:42And how worried are you about the flare up that we're seeing in the Middle East?
07:46Well, the flare up in the Middle East is clearly, you know, in uncharted territory.
07:52Clearly, Israel, and that comes back to the US market.
07:55The US market doesn't mind if growth is doing better than expected, even if that means Fed
08:01doesn't cut as much as expected, because, you know, you have to be careful what you
08:05wish for.
08:06If the economy is slowing down a lot and Fed is trying to help it, that would not be great
08:10that we're going to a recession.
08:12If economy is seeing inflation and not growth, that would be a problem.
08:16But what we are seeing is growth and not that much inflation.
08:20So maybe we're in a sweet Goldilocks spot, and at least that was what the market was
08:24hoping for.
08:25But the wildcard that has upset everything is the whole Israel Middle East situation.
08:30And we don't know what Israel's retaliation will look like against Iran.
08:35And we don't know what Iran's retaliation to Israel's retaliation will look like.
08:39So there's all kinds of, you know, the fear of the unknown is more than actually, you
08:44know, when we know what's happened.
08:46So right now, I think the market, having had a, you know, quite a decent run, is taking
08:51a little bit of chips off the table.
08:53Let's not get carried away that this is, you know, any kind of an end of a cycle.
08:56It's just taking a few chips off the table, sitting on the sidelines a little bit, waiting
09:01to see where this thing goes before committing more capital.
09:04So I think that's healthy, and I think that's understandable.
09:07I don't think it's in any ways anything cataclysmic.
09:11Okay, Arvind, just stay on, because there are some flashes would want your view there,
09:17because China NDRC chairman has said, given out some news flow, right, China will keep
09:24using ultra long sovereign bonds, allocated almost six trillion yuan of government investment
09:29in 2024, will expand loan support policies in medium term as well.
09:36But if a lot was anticipated, it seems that there is a bit of an underwhelming response
09:44by NDRC at the briefing that was on just a few minutes ago.
09:49Arvind, would the Chinese rally be, would have been a lot dependent on what the pressure
09:55would have done today.
09:56And if it is underwhelming, while the Chinese stocks have paid some gains, is the trajectory
10:01still on the upside for China?
10:04Well, my sense is with all these statements by PBOC, by the Politburo, now with the NDRC,
10:12I don't think we've come to the end of the statements, right?
10:16So if it's seen as not enough, will they follow up with something else, right?
10:21So the question really becomes, how far are they willing to go?
10:25And are they in this mode of whatever it takes, you know, to quote a famous Draghi
10:29phrase from, you know, from the previous financial crisis.
10:33So in that sense, it may cause a pullback.
10:36Again, it's not going to be a straight line, but the question is, will they follow this
10:40if this is seen as not sufficient, will they do something else after this?
10:43So my sense is, we're not at this end of the Chinese bazooka.
10:48Whether that bazooka is enough or not, time will tell.
10:52And I remain skeptical that it can fundamentally alter the trajectory, but can it cause the
10:57Chinese economy to come out of this nosedive that it's been on?
11:01It certainly can.
11:02And I think they will try to do what they can.
11:04So I don't think today's statement is the be all and end all of the Chinese effort.
11:08There's a quick reaction though coming in.
11:11Thank you so much, Arvind Sangal, for speaking with us.
11:14Always a pleasure to have you on and a very sharp reaction.