- India's standout #GDP growth
- Rise in mid and smallcap fund flows
Samina Nalwala in conversation with HSBC's Herald van der Linde. #NDTVProfitLive
- Rise in mid and smallcap fund flows
Samina Nalwala in conversation with HSBC's Herald van der Linde. #NDTVProfitLive
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TVTranscript
00:00 But of course, as the year went by, China's reopening, fiscal stimulus in the US and Europe
00:06 led to risk markets delivering broadly positive performance.
00:10 And now as we go into 2024, do you think risk assets could continue to outperform?
00:15 Yeah, I'm actually quite positive on risk assets, so I would be in equities.
00:21 You're right, if you go a year ago, things didn't look as good.
00:25 But our view on India at the time was, it might not be good in the near term,
00:29 but it will do well.
00:30 And that sort of view we have at this particular point in time as well.
00:36 What is the situation?
00:38 We know that bond yields have declined.
00:40 The US is talking about cutting interest rates at some point in time in 2024.
00:45 The market is pricing that in, that is good for equities.
00:48 Now, maybe we've gone a little bit too fast on that regard.
00:52 And we're going to see bond yields go up because we're pricing a bit too much optimism in.
00:57 And that will, in the near term, probably weigh on markets globally.
01:01 And India would not be in a particular exception.
01:04 But as we go deeper into 2024, and I think this was also the case in 2023,
01:10 the start wasn't so good, but the performance eventually will be much better.
01:15 So we like risk assets.
01:17 Global rates are coming down.
01:18 There's no belief that the US is going to go into any particular recession soon.
01:23 It might happen, but there's not a workable assumption.
01:27 We have at the moment.
01:28 So that's all pretty good for risk assets.
01:30 It's just that we've gone, we rallied a little bit too fast in December.
01:36 I need to weigh in a little bit in January, the start of this year.
01:41 So probably take a step back, consolidate, readjust and then move ahead.
01:46 But I'll take a cue from the Fed, because I think that was the key trigger that led to
01:52 a sudden surge, a sudden feeling of FOMO over the last
01:55 eight weeks when at least India and the rest of the emerging pack saw flows coming in,
02:00 even at a time when historically December is a quiet month.
02:03 Central Bank and their defence have still been on the cautious side in terms of their
02:07 communication.
02:08 I know the markets were pencilling in a rate cut in March, and then suddenly we had those Fed
02:13 minutes and that expectation now is pushed down to six months down the line.
02:17 In your opinion, while there will be a soft landing, how do you expect the rate cycle to
02:22 play out? And this is important because this is going to drive a lot of the flows and markets,
02:27 of course, factor in a lot of that before it actually happens.
02:30 Yeah, that's right.
02:32 So the Fed is talking things down and you see this with a few economists in the US as
02:37 well.
02:37 They're saying, hey, maybe this thing is not going to go as fast as you, the markets, are
02:43 anticipating.
02:44 This is probably fair.
02:45 Our own economists are saying exactly the same.
02:47 They think interest rate cuts will come through in 2024, but in the second half of the year,
02:52 not in the beginning.
02:53 But the market was saying, listen, there's going to be a rate cut and they're going to do
02:56 quite a few of them, four or five, and they start in March already.
02:59 That's too early.
03:00 So we see this recalibration.
03:02 A step back is exactly what you said.
03:04 I think that's a very good description of that.
03:08 But see this as an opportunity to get into equities, not as an opportunity to get out of
03:13 equities.
03:13 And I think around the world, there's a lot of people who have too much cash, too little
03:21 in equities, have seen the market rally, think, oh, my God, I'm missing out.
03:24 Now the markets come off, they are willing to step back in.
03:29 So I don't think we're going to see massive corrections either.
03:32 This is a buy the dip sort of market.
03:34 Hi, Harold, I'm going to talk about the report.
03:38 And I've heard a few of your interviews where you've said you've been bullish on China and
03:41 you were bullish on China in 2023 as well.
03:44 Now, some may argue that bet didn't play out as expected or liked.
03:49 What you also say is that countries like China stand to benefit more in a situation where
03:55 there are lower bond yields.
03:56 So two things here with China's underperformance last year, valuations looking attractive and
04:01 China's starting to gain more from lower bond yields.
04:04 Does that mean that China grabs more attention from you than India right now?
04:08 That's a difficult one.
04:11 See, I would have thought that that is actually the case at this particular point in time.
04:18 And in the early part of December, you saw this happening.
04:22 Japan started to fall or underperform and China started to perform well, just as we
04:28 had anticipated.
04:29 And you're right.
04:30 We've been overweight in China in the last part of last year, and it didn't work out.
04:34 And our story was really these bond yields need to peak and then China will do OK.
04:38 But when they did peak, and it was October or so, November, you saw that China started
04:44 to perform.
04:45 But then some of the other issues in China started to come back.
04:48 You had some kind of weird policy announcement that they tried to claw back on the gaming
04:55 industry that gave people an idea like, what is this policy risk in China?
04:59 We know that pension funds are still trying to reduce their exposure.
05:04 I'm talking about US pension funds, reduce their exposure to Chinese equities.
05:08 And that isn't washed through the system either.
05:11 So China has not performed as much as I would have thought under these circumstances.
05:16 India is, for me, a very different story.
05:18 For China, I think over the next years, you're going to have a flat sort of market, but you
05:24 want to trade around it and you want to have these signals-- bond yields, valuations, growth
05:29 are these signals that we use.
05:30 And you sell them when it goes up again.
05:33 And then you wait until it comes over and you buy again.
05:36 So you trade around a sort of kind of flattish trend.
05:41 India is different.
05:42 That's why I mentioned you buy the dips.
05:44 The Indian market I see upward sloping over the years.
05:47 But as it comes down, you want to buy in the dip and then stick with that as the market
05:52 goes back to trend or exceeds that again.
05:55 Harald, and this is why I'm going to come back to this question again.
06:01 While we do agree that both are very different stories and both are not competing in that
06:06 sense against each other, that, of course, is in your opinion.
06:11 But what is going to happen to foreign inflows?
06:14 I know a large part of India's gain or gains came in from domestic inflows.
06:20 But November, December saw FIs returning back to our markets.
06:23 Do you think that's going to sustain, despite everything that you've noted, indicating the
06:30 various reasons why China may land up getting a lion's share of these inflows?
06:34 Yeah.
06:35 So if you look at the absolute numbers for India, actually, the amount of buying that
06:41 foreigners can do is still OK.
06:43 They are not at levels that we've seen in the past.
06:46 In the past, they bought up to here in India, and now we're only here.
06:50 So there is still some room to go.
06:53 The risk, of course, is that China does start to perform.
06:57 And given the low valuations, if the market rallies, it could go very quickly.
07:01 People want to quickly allocate to it.
07:03 Where do they get the money from?
07:05 What people in India believe very often is that their money could come from India.
07:09 And they're right in that.
07:10 I'm not going to dispute that.
07:11 However, a lot of funds are way overweight on Japan.
07:17 I suspect some of the money will come from Japan.
07:20 So I think the risk on foreign flows is not as high as what some people believe it to be.
07:26 I think they can buy more and would not be selling as much in order to get into China
07:31 as what they've done in the past.
07:33 So India, that's supportive for Indian equities as well.
07:37 So exciting you feel like that, Harold, about India.
07:40 But let's talk about India in a little more detail.
07:43 India has given positive returns for the last eight years.
07:45 I know you and a lot of the other big brokerages outside are still very overweight.
07:50 India is a structural story, which is what everyone says.
07:53 But I mean, reality, right?
07:55 There is a law of averages.
07:57 There is a time correction, if not a price correction.
07:59 Do you think after eight years, law of averages could kick in, which could mean that investors
08:05 may want to be a little more cautious, even though structurally we are well placed?
08:10 Yeah, that's a good one.
08:11 After eight years of every year performing well, you think, well, there must be a year
08:20 whereby it doesn't perform well.
08:21 And that's a very reasonable assumption to make.
08:24 The way I look at it almost is like India is extremely diverse.
08:30 There are always some sectors that can do very well.
08:32 For me, as a kind of an outsider, it's like Indian food.
08:36 If I go to an Indian restaurant, you can get this fantastic tandoori in the north, and
08:40 you've got idli and uttapam from the south.
08:42 And the west has got fish curry, and the east has got something like that as well.
08:49 There's this enormous amount of offering literally on the table.
08:54 And with Indian equities, it's a bit the same.
08:56 So there's always something that can perform very well.
08:59 That sounds odd, maybe, to you, but in a lot of other markets, think Taiwan, it is just
09:04 tech.
09:04 There's only one thing on offer, as if it's only tandoori chicken on offer, and there's
09:08 nothing else.
09:09 So it's much more narrower where that performance is coming from.
09:15 So first thing, India is diverse and has a diverse set of drivers.
09:19 Secondly, if we look at the growth profile that comes through in India, that's actually
09:26 pretty good.
09:27 So I don't see any reason why it wouldn't perform very well.
09:30 And lastly, if you look at China and India, for the last decade, in many years, China
09:37 and India performed pretty much in line.
09:38 So the outperformance of India wasn't necessarily too special.
09:42 It's only after 2000, China went this way and India went that way.
09:46 So that outperformance of India is actually not eight years, but maybe the speciality
09:53 of it lies in more in the last two or three years.
09:56 So another year, four years, it's not too bad then.
09:59 Well, let's talk about earnings.
10:02 We are at the brink of the earnings season, which kicks off in a few days back home.
10:06 You know, most companies have indicated a third quarter will be a pretty solid quarter
10:13 for them.
10:13 And we've seen business updates, which are more or less in line with that expectation.
10:16 What do you think?
10:18 Do you think earnings will surprise on the upside this quarter?
10:21 And will the momentum for earnings continue into the next couple of quarters as well?
10:25 How are you reading into this?
10:26 Or what are your expectations largely?
10:28 Two things on this.
10:30 So first of all, on just looking at earnings, I think people need to think about earnings,
10:34 not from quarter to quarter, but from year to year.
10:36 If you invest in a house, you buy a house and you're not going to check the prices the
10:42 day after, see if you want to sell it already.
10:44 I think with equities is a bit the same.
10:46 Look about the longer term trend in earnings, not so much on quarter to quarter.
10:49 But that's that's the first thing.
10:51 Secondly, I do think that the earnings profile is going to slow in India.
10:57 Last year, you had about 26 percent.
10:59 This year, it's going to be somewhere around maybe high, high teen, 16, 18 percent or so.
11:04 Why is that the case?
11:05 If you look at the banking sector, they got the positive to give to others loans.
11:11 But there's not much room.
11:14 So if you want to grow your loan book, you need to get the deposits in as well.
11:18 And that means you either raise your interest rates.
11:20 And if you don't want to do that because it impacts your margins, you slow down your loan
11:23 book.
11:24 And that means that expansion and growth that goes into the private sector in particular
11:28 will probably slow down as well.
11:29 So I think the earnings growth will slow.
11:32 But if this quarter is going to be a wash or going to be bad, below expectations, I'm
11:36 not quite sure.
11:37 My suspicion are the expectations are a little bit on the high side.
11:40 So we're going to be a little bit careful.
11:43 But the overall numbers for this year will be good.
11:46 And the beauty of India and actually Indonesia is as well as that if you look at the underlying
11:51 drivers of this, think about, for example, retailers, they are gaining market share over
11:57 mom and pop stores.
11:59 You see investment being laid out because India is going through an investment program.
12:02 New infrastructure is being put in place.
12:04 I was in Tamil Nadu a couple of months ago and drove around to see temples.
12:09 So half of the road, you can actually be on the highway.
12:12 But then suddenly the highway stops and you go through small roads that go through peddy
12:15 fields because the highway is not there yet.
12:17 So infrastructure is being built out.
12:19 And the benefits that come from that will come out over the next couple of years.
12:23 The interesting thing of that is that these are all long term drivers of growth that doesn't
12:27 disappear from one quarter to another.
12:29 So I'm quite positive, therefore, a longer term growth potential in India.
12:32 I think over the next two or three years, you're going to see an average 15 percent
12:35 growth in that market.
12:37 That's pretty good.
12:38 Phenomenal.
12:40 Well, stay with us.
12:41 We'll take a quick break.
12:42 We'll come back.
12:42 We'll talk about your strategy in depth, specific to India.
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15:51 Welcome back.
15:52 We're in conversation with a very special guest, Harold Vander Lint, head of Asia Equity Strategy.
15:57 HSBC joins in.
15:59 Harold, I want to quickly start talking to you about sectors that you're optimistic on
16:03 with regard to India.
16:05 Would you be building stocks dependent on government spend, so especially with continuity
16:09 of policy?
16:11 Would that be a theme you would play with?
16:13 And also, of course, demographic dividends, which are translating into an emerging consumer
16:18 class in India.
16:19 That as an idea as well is becoming of interest for a lot of international investors.
16:25 That's right.
16:27 Now, first on the consumer side, I think the way to look at consumers is slightly different.
16:32 I do a lot of work on demographics in the whole region.
16:37 But I think where India stands out is that its consumers are basically located everywhere.
16:43 Contrast this with China.
16:44 The majority of the Chinese consumers sit in Shanghai, Hong Kong, or Shenzhen, or Beijing,
16:52 or any of the other key markets there.
16:55 Fairly concentrated.
16:58 In other markets, Indonesia is the same.
17:01 You want to be in Jakarta.
17:02 In India, this differs.
17:04 You've got thousands and thousands of mid-sized towns, which, by the way, in most countries
17:10 would be huge cities, but in India, standards are mid-sized, all scattered around the country.
17:16 So the secret, I think, with consumer companies in India is not only the product they have,
17:22 but the distribution capabilities they have to reach to these people.
17:25 That is extremely powerful.
17:27 And that explains why some of these Indian companies belong to the most profitable companies
17:32 on the planet.
17:32 So that's a sector that we like.
17:34 Autos is something we like as well.
17:37 I would be a bit more careful with the exporters, where the global economy is going.
17:46 Energy offers good value.
17:49 So that's where I would look in.
17:51 And the large-scale banks have underperformed last year.
17:54 I think there's relative value on large-scale banks in India as well.
17:58 So those are the sectors that I would be focusing on.
18:01 Harald, how do you feel about sectors like defensive, railway, speciality, chemicals?
18:07 These are smaller sectors, but they are darlings of the street.
18:09 Oh, absolutely.
18:11 So there's some of these railway companies that I've looked at last year.
18:16 I do a class at the university, and I ask students to sometimes look at particular stocks.
18:22 So I pick some of the railway stocks in India for them to look at, because that's an exciting
18:28 sector.
18:28 And it goes back to what I mentioned.
18:29 I was in Tamil Nadu, infrastructure is being built out, the growth benefits from that come.
18:34 And you can play that through in many ways, but the building companies or the railway
18:37 companies would fit very much into that particular theme.
18:40 So yes, it's something that I like as well.
18:42 And then you go deeper in the market, right?
18:44 These companies are kind of mid to small gaps, actually, in many cases.
18:48 And do you think, Harald, while there is excitement in the broader markets, and if we are talking
18:54 about the growth that we are, which is 15% CAGR for India going in the next five to 10
19:00 years, the small and the mid-cap stocks have to do the heavy lifting.
19:05 Ironic, because if flows have to come in, they're going to come into the large-cap space.
19:09 How does one play that out?
19:12 Because your small company or a mid-cap company has to become a large cap, and HDFC can only
19:18 do that much if India's got to grow at the pace we are.
19:22 That's right, but there's still a lot of growth out there for some of the large caps,
19:26 so I'm not so worried about that.
19:28 My worry is more that some of the small-cap stories are really interesting, but they perform
19:31 very, very well.
19:32 So on a relative basis, I would prefer the large caps.
19:36 And my worry is also with small caps, the liquidity can dry up.
19:41 So the moment you say, oh, this is great, and everybody seems to be trading in it, you
19:45 don't look at it for a couple of weeks, and then you say, let's look at it again.
19:49 You want to sell, and it turns out the stock is going down, and there's no liquidity.
19:52 You can hardly sell unless you really reduce your prices.
19:55 So I think you're going to be a little bit careful with those stocks as well.
19:58 I would prefer to stick with a large cap.
20:00 There's plenty of growth.
20:01 Don't need to be too greedy.
20:02 If you have a company that grows 15%, 16%, 70%, 80%, that's pretty good in the world
20:08 that we live in.
20:08 Fantastic.
20:10 Harald, I've got a couple of minutes left to go, so I'm going to quickly slip in another
20:14 question.
20:15 I want to understand from you, what is a risk to India's structural story?
20:18 I mean, we've highlighted all the positives, everything that's working for India, from
20:23 the government to earnings to an emerging consumer class, infrastructure, valuations
20:31 you and me can argue about.
20:32 But what could go wrong for us?
20:34 And that's a pertinent question, because we've ran up so significantly now.
20:37 Yeah.
20:39 I think there's a couple of risks for India.
20:41 There are-- let's put it like that.
20:43 There are some risks that are maybe more near-term and that pop up once in a while.
20:47 For example, higher oil prices would be a risk, the currency moving.
20:50 Other markets, such as China, suddenly rallying and sucking out the capital that is in India
20:55 could be a risk.
20:57 I would consider those to be more near-term risks.
21:00 Inflation is always a risk.
21:02 If food inflation happens, we're living in a world where the Red Sea and what happens
21:07 in Ukraine and other places, food inflation could suddenly come back.
21:10 But that's not good for India.
21:11 It means your interest rates go up.
21:13 And I would call them sort of cyclical risks.
21:16 Then there are risks really about the long-term path for India.
21:20 I think India could do more in terms of education in large parts of the country.
21:25 There are parts of India where education is excellent.
21:28 There are parts of India where education is poor.
21:31 If you don't address that, these regions will struggle to perform.
21:35 So that's something that I think could be a risk in the very long run, at least for
21:42 some parts of India.
21:45 I think what we see in other countries is sometimes sudden shifts in policy.
21:49 Now, that is not really the case in India, but people are very sensitive to that.
21:53 So if you see sudden shifts in policy, changing regulations for industries, that is a risk
21:58 that is everywhere.
21:59 It's not so prevalent in India at the moment, but neither was it in China until a couple
22:04 of years ago.
22:04 So that's something people would be quite sensitive to as well.
22:09 Very lastly, Harald, you talked about those risks.
22:13 Now, give me the likelihood of these near-term risks playing out.
22:17 I do understand conditions are constantly evolving, but from where we stand, how likely
22:22 is it that these jokers in the pack may actually play out?
22:25 Well, for the near term, it doesn't really look to be a major problem.
22:30 The dollar is weakening, so your currency is probably going to be somewhat supportive.
22:34 That's good for inflation.
22:35 The oil prices are at least under control at the moment.
22:42 The picture of the earnings growth is pretty good.
22:44 Food inflation is not something we are immediately worried about.
22:48 So they might emerge, but it's not something that I say I can't sleep about this in the
22:52 middle of the night.
22:52 So this comes back to why you want to buy into dips.
22:57 The risks are moderate, at least from what we can see at the moment.
23:02 The earnings profile is pretty good.
23:03 The valuations are high, but in a dip, those valuations come off.
23:07 So it looks pretty good.
23:10 Harold, what an amazing conversation this Monday morning.
23:13 Thank you very much for your time.
23:14 It was indeed a pleasure to get a sense from you on the India story.
23:18 Well, with that, it's a wrap.
23:20 We're completely out of time.
23:21 But thanks for watching Talking Point.
23:22 There's a lot more on the other side, so stay tuned.