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00:00Kenneth Ickinton, I don't know if I've got that pronunciation right, more than likely
00:04Kenneth I've got that wrong, he's the head of Asian Sovereign Debt at Abdeen Investments.
00:09Kenneth, hi, thanks a ton for joining in.
00:12Kenneth, Neeraj and me are sitting in the studio feeling very excited and proud actually
00:16as India does finally make it to the JPM Bond Index.
00:21This is also significant because up until very recently, our ratings was just a notch
00:27above junk, and especially when India's got a strong growth story, it's got a solid reading
00:33in terms of the way the currency has been behaving, performance of Indian paper has
00:37been far better than most or all emerging markets in the recent past, and inflation
00:41is not really a concern and policy continuity remains.
00:44So keeping all that in perspective, what are your thoughts?
00:48How big a deal is this?
00:51Good morning and yes, you should indeed be feeling very proud.
00:56I've been covering India for 20 years, but 20 years ago, it was almost impossible as
01:02a foreign investor to invest in the India bond market has been one of the most challenging
01:06and dare I say frustrating markets historically to invest in.
01:09So that just tells you how far India has come, both in terms of its economy, but with wide
01:15ranging sweeping reforms, its capital markets as well.
01:19It is important for India, it is indicative of the many, many reforms that have happened
01:23across the board, but we mustn't lose perspective that this is even more important for foreign
01:29investors, because the world that India is operating in is a very challenging universe
01:34and none more so than for emerging market investors.
01:37You noted the performance of some of these markets, local currency, emerging markets
01:42are down 4% this year, global bond markets haven't performed very well, but India is
01:46actually up roughly about 4% year to date, maybe even slightly more.
01:52So when you think about the volatility in emerging markets, we've gone through volatile
01:56politics and many, many EM economies like Mexico and so on.
02:01When you put India into that basket of risk, this is going to significantly benefit foreign
02:07investors.
02:08As soon as you include Indian bonds into these portfolios, the volatility of those portfolios
02:12drop and most likely the risk return profile of those portfolios improve significantly.
02:18So the sooner India can get to its maximum 10% weight in these industries and investors
02:23can be encouraged to increase their weighting in the market, the more they're going to benefit
02:27from the very, very favorable risk characteristics that Indian bonds give to investors.
02:33Can completely take your point, right?
02:34I mean, I think there was frustration because there's only limited ways in which you could
02:38go out and buy Indian paper and up until now, it was always a hedge or an arbitrage instrument.
02:43It was never really long term sticky money that came away.
02:48How does this change the dynamic for active investors as well, right?
02:51So you have passive funds that are going to come into the JPM.
02:54Will this also nudge active managers who've been trying to front load?
02:58And they have.
02:59We've seen about $10.4 billion of money come in even ahead of this inclusion today.
03:04What does it mean in terms of total inflows that we can expect?
03:07And do you feel like this could be a trigger where cost of funding could go down, not just
03:12for government paper or government borrowing, but even India Inc that borrows outside?
03:17I mean, investors, to be honest, already have had active overweights to India.
03:21If you look at most emerging market local currency portfolios, they have actually had
03:26some exposure to the Indian market.
03:27Now we can debate how they took that exposure.
03:30Maybe not all of it was in the domestic bond market, structured products, some of the alternative
03:34investment routes.
03:35But more and more of those investors are likely to now invest into the domestic market as
03:40their main source of access.
03:42And if you look at the relative performance between Indian bonds and some of the other
03:46EM and all even global bond markets, it would strongly encourage these investors to have
03:51an overweight position.
03:53So obviously over time, there'll be new investors coming into this market that their main priority,
03:59first of all, will be to ensure that they have at least an index weight.
04:03So you're not sitting underweight in the Indian market because that could drive underperformance
04:06of your portfolio.
04:07So a relatively passive position, first of all.
04:10But as the familiarity of the market, both in terms of the drivers of performance, how
04:15to think about how RBI conducts policy, inflation outlook, as these investors become more and
04:20more familiar with the India story, they will become more and more comfortable with trading
04:26the market.
04:27So you'll begin to see more active management of the market.
04:30Now, of course, that comes with, in the more medium to long term, a slight risk because
04:35as investors become more active, then the volatility may pick up slightly and maybe
04:40the correlation to other markets may pick up slightly as well.
04:43But I think we're very, very long way away from that being a concern.
04:47You're asking about the amounts of flows to come into the market.
04:51So the JP Morgan bond index, GBIEM index, there's roughly around $300 billion of global
04:56capital to track that index, and India will have a 10% weight in the index.
05:01So you would assume there'll be roughly about, you know, $30 billion in passive flows.
05:06But of course, this is only part of the story.
05:09This is not the only index that is likely to include India.
05:12With a long enough time horizon, other bond indices like maybe the Bloomberg Barclays
05:17Global Aggregate Index could include India as well.
05:21So it's going to be a multi-year process of more and more indices featuring India and
05:25investors building positions.
05:28The good thing is that this is a huge bond market.
05:31It's one of the reasons it's so attractive for a wide range of investors, you know, $1.5
05:36billion government bond market, which means that even if you've got $100 billion of foreign
05:40money coming into the market, it's not really going to distort valuations and volatility
05:46too excessively.
05:47So those favorable risk characteristics will still be maintained.
05:50And the domestic investors, the banks that you see onshore, the insurance companies,
05:55these are still going to be the most important drivers of the market.
06:00Now in terms of the outlook, it is such a favorable environment.
06:03As you mentioned, inflation is coming down.
06:06The start of the monsoon looks more favorable than we've seen, obviously, last year.
06:10Rainfall should improve without helping food prices down.
06:13The fiscal performance of the government, you know, you have to give them an A star
06:17for that.
06:18We've really seen the benefit of fiscal reforms coming through in terms of improved revenue
06:23performance.
06:24Obviously, the outcome for the fiscal deficit has been even better than expected.
06:29And we've got the budget in July where there is even a potential that we'll see the government
06:33set an even lower budget deficit target than was expected.
06:37Also supported by the fact that the Reserve Central Bank, the RBI, is transferring a greater
06:43amount of money to the government, which has given them an even stronger position to come
06:49from.
06:50So all these things put together, you've got a very favorable supply position for the bond
06:54market and obviously increased demand for it.
06:57So we should see yields come down.
06:59Obviously, as we look into the start of next year, when there'll probably be a more conducive
07:03environment, Reserve Bank of India will be able to cut policy interest rates as well.
07:08And the good thing about the bond market is unlike other bond markets, that isn't really
07:12priced in.
07:13So in many other bond markets, we see yields already below the policy rate.
07:16In India, yields are above the policy rate.
07:19So as the policy rate comes down, we can see bond yields come down as well.
07:23So as well as the very attractive yields that you get, there's opportunities for capital
07:27gains from the bonds as well, on top of a very stable currency.
07:30You're right.
07:31In fact, that's what we've been waiting on, that these local investors have been waiting
07:34to create that, generate that alpha that hasn't been seen on Indian paper.
07:38But very quickly, Kenneth, you talk to clients, I'm assuming, and you know this best.
07:42Indian debt allocation would be part of the India basket in that sense, or is the Indian
07:48debt market going to compete with Indian equities in terms of flows it draws, or is it going
07:53to be Indian debt versus other emerging market debt in that sense?
07:57Do clients have a geography allocation or an asset allocation in that sense?
08:02I don't know if I managed to frame that question right, but I hope you get the drift.
08:07There's quite a diverse set of investors.
08:09We see everything.
08:10There are those investors that invest into diversified Asian strategies, of which India
08:14plays a large part of that.
08:16One thing I would say is for some of the key indices that we use for Asian markets, honestly,
08:22India is still underrepresented there.
08:23The weight of India should even be higher in those indices as well.
08:27So there's the potential for Asian investors to increase their allocation to the Indian
08:32bond market.
08:33At the moment, the main focus will be on the emerging market investor group, because those
08:37are the groups of investors that are more obviously going to see India playing a larger
08:41role.
08:42And there will be reallocations within those portfolios.
08:44So they will have to sell down some of the other markets in their portfolio, some of
08:48the Latin American countries, for example, whose weights will be going down in the GBI
08:53EM index.
08:54Those markets could get sold down in order to make space for India allocations.
09:00And for India, bonds is becoming more on the radar for global bond investors.
09:06As I mentioned previously, there will be a point where India starts going into global
09:11bond indices as well.
09:12And so we'll see an even broader set of global bond investors.
09:16Now, the thing is, some of them haven't waited for India to become part of their bond indices.
09:21Some of them already understand the attractive characteristics of the market.
09:25And we've seen far more global investors investing into the Indian market than we did previously.
09:29Yeah, yeah, yeah.
09:31And which is why I think we've seen this close to 10.5-11 billion dollars of flow since September
09:36as well.
09:37Great.
09:38Kenneth, would love to talk more, but out of time on this, but thank you so much for
09:41giving us your insights.
09:43Really appreciate your time.
09:44Thank you.
09:45Look forward to having you more often.
09:46Sure.
09:47Thanks.
09:48Take care.