- U.S. bond yield breaches 5%
- FII outflows continue
- Why India remains an outperformer
In conversation with HSBC Securities' Amit Sachdeva on Talking Point. #BQLive
- FII outflows continue
- Why India remains an outperformer
In conversation with HSBC Securities' Amit Sachdeva on Talking Point. #BQLive
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NewsTranscript
00:00 for tuning into today's Talking Point. I'm your host, Neeraj Shah. The case for a chat for having
00:04 Amit Sachdeva, who is the India Equity Strategist and Consumer and Retail Analyst at HSBC,
00:09 are the rising Boeing deals in the US 5%? Add to that the other high frequency indicators,
00:16 be it higher crude prices or the weak global markets, suggest a tepid picture.
00:20 Is it all worrisome, though? Maybe not, if Amit's latest note is to be read.
00:25 I welcome him on the show today. Amit, great having you. Thanks for taking the time out.
00:29 Thanks so much, Neeraj. It's always a pleasure to be on your show. Thank you so much for having me.
00:33 So, Amit, it's just so topical to have you today because the yields this morning or whatever have
00:39 hit that near 5% or the 5% mark in the US. Everybody's putting out the signs of worry
00:45 because of that. How would you read into this and the impact on risk assets?
00:49 It's a great question. I think if you just put that entire India scenario in the context,
00:57 if you look at India has been a decisive bull run from March onwards, and we had seen six months of
01:04 very strong inflows. To be honest, 21 billion, to be precise. The bulk of the Asia, ex-China
01:10 EM flows came to India, 85%. Now, this rally has been one sets in, it's difficult to break,
01:18 to be honest, but September onward, we have seen problems. And about 2.3 billion in September and
01:25 800 billion so far in October. Now, why is that happening? The large part of that 2.3 billion
01:32 output that we've seen is on account of very sharp rise in US bond yields. And then October has seen
01:38 some amount of geopolitical tensions, which has risen suddenly, and has also become cause of worry
01:44 causing volatility in food prices. And also, that feeds into the inflation narrative and all
01:51 risk offs and other things as well. So it's a bit of a worrisome picture there as well.
01:55 But US bond yield is indeed worse, right? Because it triggers outflows from India and other EMs as
02:02 well. Let's look at what has happened so far. So in a recent note, we've analyzed, we've done it
02:08 into actually last two decades and put together 21 such episodes where US bond yield rose
02:17 50 bps or more in a very short period of time of one month. What happened to India's is obviously,
02:23 there's so many other factors at play, but we tried our best to isolate that effect
02:27 so that we can think clearly when these things happen, it's important to think clearly how much
02:33 should be that impact. Nobody knows every time market learns something new. But at the same time,
02:37 our observation has been that in the past cycles, this last decade has been very sensitive.
02:46 Previous decade has been slightly less. 90% of the time such event has happened,
02:51 India has seen major outflows. And these two evidence we've seen that flows outflows are
02:58 very concentrated in a very short period of time, say one month, and about median outflow is about
03:04 2.5 billion. So but then it sort of settles down, right? But provided that no incremental other
03:12 major hikes, for example. Now, what has happened in India so far, we've seen 3.1 billion outflow.
03:18 I would hazard that some part of it is US bond yielded, some part of it is led by
03:24 other geopolitical risk as well. But September was there was no geopolitical risk was in the picture.
03:29 Actually, it's a new one, we had only US bond yields playing out, we saw 2.3 billion outflow,
03:34 very close to the median outflow that has happened in the previous past episode. So my sense is that
03:41 if you purely isolate US bond yield effect, at least whatever we've seen so far, is large part
03:48 of it is reflected in the outflow. But there are other risks such as crude and geopolitics, which
03:53 is still playing out, makes us flow still very nervous, right at the same time. So I would say
03:58 this is a large factor, because that tends to play out almost immediately. And markets tend to price
04:05 relatively very quickly in a very concentrated manner. It doesn't, you know, gradually unfold,
04:09 it just gets priced in very quickly. So what outflow you're seeing, is a symptom of that
04:15 nature of the market, to be honest. I hope that answers your question. But what I want to say is
04:20 that while flows are negative, it's largely driven by a high US bond yield pricing. And most part of
04:29 it is priced in, if you assume that no major such rise is happening in future. Got it.
04:36 The only counter to that and a question that I have that could this time because the yields are
04:41 at 5%, which is a high number. So the risk free rate for any global investor is 5% plus the
04:48 currency that comes in. And could global investors therefore think that why should I bother with all
04:53 the risks around EM equities, including India or other EM equities, when I'm getting this,
05:00 this kind of return, risk free, so to say, in the safest haven currently, could that
05:07 impact future flows, even if there are no more outflows, could inflows get delayed?
05:11 They do. It happens because in you know, outflows when happens, suddenly doesn't rebound so sharply.
05:20 Market takes time to digest how the yields are shaping up. And think about it, one assets become
05:27 very attractive, such as US bonds, right? And then flows naturally follow their risk
05:32 reward become favorable. And then in this process, India valuation become more appealing. So there is
05:38 always an equilibrium that that market see that that rally has happened there. But Indians valuations
05:44 have corrected then after a period of time rebound happens because this also India's own structural
05:50 story at play. While this is a near term dynamic, to your question cost of capital, see cost of
05:56 capital can work in myriad ways, right? When we are very risk averse, we tend to exaggerate
06:01 everything in a short run, right? And we perpetualize. And when we are and when you discount
06:07 future cash flows, we are discounting almost perpetuity, temporary rise in yields, while it may
06:14 be tempting to just discount all the future with that yield. But in reality, it creates situation
06:20 where assets become very appealing if market were to do so. Converse is also true when we
06:24 borrow so far so much that you believe that is forever. That's not true as well. You create
06:30 asset bubbles. So truth always lies in between. And that's where everything clearly you find
06:37 opportunities to actually play during such phases of market. Interesting. Just one quick, again,
06:43 flows related question, but HITRA-2 China was not quite attractive. The latest data from China is a
06:50 slightly more attractive number than what people might have thought. If they do indeed turn on
06:54 the taps of the stimulus, then valuation-wise, it's way more attractive than a lot of markets.
07:00 And if we consider that if indeed the semiconductor run has a kind of the bottom is reached,
07:06 then South Korea also kind of comes up in valuation come maybe growth. Is that a counter
07:12 to India's attractiveness in the region for global FIs? No, I think this is a very good question
07:18 because India has been an outperforming market three years in a row. In 2021, it outperformed.
07:26 2022, although it was negative, it still outperformed. 2023 again, it outperformed, although the first
07:31 quarter was bad. Now, question is that at some level, market would think let's mean revert,
07:37 let's go somewhere else. Why one way street? So there's a short and long balance to it.
07:45 But I would probably think that two ways to think about it. That's if China were to rebound and given
07:50 that these relative opportunities are very good and very cheap, then
07:55 immediate risk would be that some tactical outlook can happen. Doubtless, that's a risk. But question
08:01 is how deep that, how sustained that. My sense is India's rise of structural market
08:09 is probably more proven than in the past because the macro has been stable, growth has been resilient.
08:16 So I would probably think that if valuation correct a little bit, there's a case for rebound in India
08:22 back again. So that effect will be short. Second is China obviously is in a recovery path, but there's
08:28 several still several macro unknowns and it's still more tactical rather than structural.
08:33 So while some opportunities may happen and people may seek, but people have burned
08:40 fingers in China in the first year and so it will not be too early that entire flows goes back.
08:46 And third, India and China for most part of history can actually perform together at the same time.
08:53 They are not zero sum, it is non-mutual. It's one of the years that happens because see China
08:58 for a typical year would attract 100 billion inflows. India 10 to 15. Now question is that
09:04 for China to rise, India is not a low market that can supply all the funding and all those things.
09:10 It can come from elsewhere as well. So put that together, risk is there definitely, but I would
09:15 probably think that such a tactical risk would create opportunities for India position to become
09:20 more valuable and hence this would be very short-lived. And as they say in Hindi, Desi toh bethe hi hain.
09:26 The Indian flows continue to be robust. And that's what I always say,
09:32 off late what has happened after 15-16, the rise is more and the fall is less.
09:36 Because it pushes a blow when FIs goes, but when both flows become very attractive, then it's
09:44 actually magnified on one direction and pushed in the negative direction. So India's structural
09:49 appeal as a market even from a flow point of view because the local dimension of it has risen.
09:56 Great. Now I heard you and by the way your note brings out this interesting point about that how
10:01 barring technology and energy most sectors have registered positive. So I had a question there,
10:05 but maybe there is paucity of time. The RBI governor is slated to speak. So I'm tempted
10:09 to ask you a follow-up to a point that you made earlier in this conversation, that it is in times
10:13 like these that you like to look for opportunities or areas wherein you can make the biggest bang for
10:20 the buck. It's not verbatim, but I believe this is what you meant. Can you explain that point and
10:25 how are you looking at that point? So look, in this point, one thing is for real. Volatility is real
10:32 and markets' perception of risk on and risk off is also real. It can gravitate from one position
10:38 to another in a relatively short period of time. In that sense, one needs to play both the parts.
10:44 One cannot simply use only risk on assets which may not play out or you buy only the risk off
10:51 assets and so you run the risk of choosing one side in a disproportionate manner. So good view
10:58 would be that you look at sectors which are well positioned. I would think financials are still
11:02 well positioned, retail is well positioned in our framework, but also some risk on sectors like where
11:08 things are very bad right now, but valuation as a result will become very appealing. So if you take
11:13 a two-year view rather than take a one-year view, you might find some risk reward there.
11:18 Anybody's guess, ITs, anybody's guess given the global events, but at some level, people think,
11:24 you know, hang on, it's a structural sector, very defensive, now it's played out. I would probably
11:28 like to think, is there an opportunity there? So you have to think both the sides at the same time,
11:33 face some momentum in autos which is going very well. You could also think about some other
11:38 consumer discretionary names. So there's a basket which can still play out where earnings are good,
11:44 recovery is happening and there's a basket which is very cautious. We believe we were cautious on
11:49 consumer staples earlier and I think that is panning out a little bit and where the flows
11:54 have been very negative for the last three months in consumer staples. So that we continue to sort
11:59 of see as a cautious view there. Got it. Amit, afraid we'll have to leave it there, but it was
12:05 lovely talking for this short period of time as well. It's great to read your note in the morning
12:09 because it's just so timely. So thank you so much for both this conversation and the lovely note
12:13 that you've written overnight. Thank you, Neeraj. It's always a pleasure to be here and speak with
12:19 you. Thank you so much. Much appreciated and viewers, thanks for tuning into this edition
12:22 of The Talking Point.
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