In Conversation With Goldman Sach's Sunil Koul
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00:00Welcome, you are watching Talking Point. I am Tamanna Anantha and we have a very special
00:16guest today. Great time actually to speak to Sunil Kaul, Asia Pacific Portfolio Strategy
00:22Goldman Sachs because a lot of the conversation we are having right now across the world and
00:28in India as well is focused on what is happening globally and you know even though we are now
00:35a country with a huge force in the term, in the context of domestic investors, yes, what
00:41Jerome Powell says, Jackson Hole does matter. So with that set up, Sunil, great to speak
00:46with you on NDTV Profit and absolute pleasure to have you on the show and get your view
00:51on what's happening in emerging markets but let's talk about India as well. So let's start
00:57with the foreign investment outlook for India. We have been seeing outflows, your recent
01:03report highlights that, that India is one of the two emerging markets I think if I recall
01:09that are seeing foreign investor outflows. Can you lay out for us why you think that
01:14is and do you see this is a persisting trend? Sure Tamanna, first of all thanks for being
01:22on the show. I would say look, I think in terms of the foreign flows, you are right,
01:27India has been seeing foreign outflows. I think the month to date we have already seen
01:32about 2 billion foreign selling from the July peak, it's probably around 3 billion selling.
01:39But I think as you mentioned, we also have to look at the broader context in terms of
01:42what's happening around the globe. So obviously we had a lot of volatility in the markets
01:47in July and August. So if you look across the region in Asia but also broadly in the
01:52EM, we have seen close to 18 billion selling in the markets and so I think India was just
01:57a part of the global risk off. What we are hearing also from the clients is that even
02:03though markets have recovered in August, people are still kind of de-risking across the regions.
02:08We are not seeing it just in India but also in Taiwan, in Korea, in China, onshore markets
02:14as well. So I think it's a part of a global sell off and to be fair, I think India in
02:19fact has been outperforming in performance terms both in July and August in general.
02:25I think that just shows India's resilience in the face of the global sell off. And so
02:31I wouldn't read too much into the global outflows in India, it's just the broader de-risking
02:38in the region which India is also a part of.
02:40Okay, fair enough, fair enough. So it's part of the bigger picture but then two things
02:44that you hear very often and not only in the context of foreign investors to be honest
02:49but in their context as well is about some concern about valuations. Now we have sort
02:56of become a market and like I mentioned in my opening comments driven by domestic investor
03:01liquidity as well. Is there a sense of discomfort there in your conversations?
03:08There is, I mean in fact I think valuation remains the top most I think concern from
03:13clients in terms of India's story. I think the great fundamental story is pretty well
03:18known but I think the greatest pushback we continue to see around valuations. But I would
03:22say a couple of things on that, Tamanna. One, I think if you just look at the aggregate
03:27market, Nifty is trading at roughly around 21 times forward earnings, MSCI India is a
03:34bigger index and has a bit of mid-caps in there as well so it trades a bit more expensive
03:39around 23 times forward. But if you look at what we think the fair value for Indian equity
03:44is it based on the domestic growth outlook, global growth outlook, the fund flow situation,
03:48we think around sort of 20 times forward earnings is a fair multiple. And so I would put India's
03:54valuations as richer but not sort of in the overvalued territory if you look at in that
03:59context. I think it's also important to look at India's valuations relative to everything
04:03else particularly emerging market or the region in Asia. So India is right now trading
04:09at 80% premium to the region. So the last five years average is around 50% but the peak
04:15was around 100% plus. So again I think if you look at that metric it will tell you that
04:19India is kind of trading like a growth stock where foreign investors are giving it a premium
04:24but it's not super expensive from that standpoint. And I think the last point I would make is
04:30that you also have to look at the valuations in the context of the market performance and
04:35underlying earnings. So in MSCI India terms the market was up 20%. Eight months into the
04:42year we are another up 20%. So the market has had like 40% plus returns in the last
04:4720 months or so. But if you disaggregate that 40% returns into how much came in from multiple
04:52expansion versus how much came in from underlying earnings, almost 30 percentage points and
04:57a little bit more of that has come in from underlying earnings. So the multiple expansion
05:02has been only in sort of single digits. And so if you came into 2023 India was trading
05:08at MSCI India was trading at 23 times multiple, today is 23 and a change, 23 and a half. So
05:14in aggregate the multiple hasn't expanded. Obviously different sectors have moved a lot
05:18but a lot of the underlying move has been driven by underlying earnings which we think
05:22is obviously a good thing to have and which is why we are positive on the market.
05:27Definitely positive on the market and perhaps another factor is the MSCI rebalancing which
05:33will now kick in and you know your report talks about it Sunil, where you say that you
05:37expect the largest passive inflows coming into India because of that rebalancing, upward
05:43of 4.3 billion USD. Does that then spur active inflows as well?
05:51Probably not on the back of the rebalancing because the rebalancing is kind of more a
05:56technical event. It happens at the end of the month. The reason India is getting sort
06:00of 4 billion plus inflows is because you have seven stocks that are coming into the index
06:06in MSCI India and so the number goes from 140 plus stocks to nearly 150 stocks there.
06:13And so the flow is very concentrated in these names that are getting included and also you
06:20have the largest private bank where the foreign inclusion factor was increased. So that's
06:25also driving a lot of flows. So I think it's very kind of concentrated in a few stocks
06:30and largely kind of technical in nature, which is why because of the index rebalancing the
06:34passive will have to do it. But we don't think it necessarily means that active will need
06:40to follow, but I think the bigger picture here is that as you show in the picture that
06:45India's weight in the emerging market is going to increase or MSCI index is going to increase.
06:51So from 19% or 19.4 as you show in the table, it's going to be close to 20% of MSCI EM and
07:00China is at 22. And so India is kind of a close number two in terms of the weight. So
07:05that means that it would be the second largest market in EM and very close to China. And
07:11so over time, we think that will encourage more active investors to come in and increase
07:17exposure to the market.
07:18Yeah, yeah, that's a big one. India will be the second largest market in EM and closing
07:23in on China. Now, in your report too, and I've cherry picked the India specific ones,
07:30Sunil, if you will allow me, because you know, relevant to our viewers, two charts that really
07:35stood out for me. One is that retail sentiment is above historical levels for India. You
07:40also talk about how risk appetite seems to be waning. Now contextualize that to us. I'm
07:46of course, reading it together, that may not necessarily be the right way to do it, but
07:49to contextualize it for us.
07:52Yeah, I mean, look, I think the risk appetite sort of waning is again, sort of something
07:57we are seeing across the region. As I said, I think in general, for Asia, for emerging
08:01market, when you talk to clients, it's very clear that obviously, markets have been super
08:06volatile in the last couple of months. We also have, as you started the show with sort
08:12of Fed policy coming in, Chairman Powell comments coming up. But more importantly,
08:17you have US elections coming in, in November. So I think the general sense is that markets
08:21are likely to remain volatile across the globe. And so people are generally kind of de-risking
08:27into the event, which is why we kind of are seeing risk appetite barometers, not just
08:33in India, but pretty much across the board at low levels. And a large part of that is
08:37because of the foreign selling we just started the show with. But I think domestic flows
08:42is obviously a separate story, which is what has been holding up the market, as we know.
08:47I mean, to ask someone that, that seems like a structural trend, because as we know, India's
08:52household balance sheet exposures are still pretty low compared to sort of regional peers.
08:596-7% of the household balance sheets are in equity markets. In US, that's north of 40%.
09:06In Europe, that's 20% to 30%. Even in Asia, I think the average is more like 15%. So we
09:10think this is kind of a structural trend, and it has more room to grow. And I think
09:15therefore domestic flows will continue to support the market here. In addition to that,
09:20you also got mutual funds sitting on decent cash balances, around 4% of the AUM, which
09:25in absolute terms is north of 10 billion US dollars. So you got sort of more money coming
09:30in from retail in terms of SIPs, which are hitting every month new highs. And then you
09:35also got mutual funds by themselves sitting on large amounts of cash balances, which
09:39we think will continue to support the market here. I think what it means is that in these
09:43environments of global kind of risk-off, India will continue to be sort of outperforming
09:49on a relative basis, even if directionally it may be kind of more flatlining or go down,
09:54but it will still be outperforming the emerging markets, broadly speaking, over the next few
10:01months.
10:02You've also talked about, Sunil, about how there is a lot of global money sitting, which
10:08is underweight on India. So now we've talked about various things, right? It's a larger
10:14picture why you are seeing FII outflows, MSCI rebalancing might not really move the needle.
10:20I'm trying to understand what are the factors that would change that outlook? Yes, the domestic
10:26industry is strong, etc., or the domestic retail flows are strong, etc. What would change
10:31the outlook? Because it seems unlikely there is going to be any big change in valuation
10:35or the valuation picture anytime soon. No, I think that's a fair question. I would say,
10:41look, I think the fact that the market is becoming bigger, economy is becoming bigger,
10:46and you've got liquidity improving in the market, I think that should get more investors
10:50into the market. And so obviously it's kind of already sort of a fortral economy and an
10:55equity market and liquidity, which was always concentrated in the top kind of 50-odd stocks,
11:01and 50-50 is obviously broadening out. And the way we started the show, I think MSCI
11:07India is a good example of that. A few years back, it used to be only have 60-70 stocks.
11:11Today, you are double of that index, which has both a market cap and a liquidity criteria.
11:16So you're kind of seeing market broadening out, and we are also seeing people or foreign
11:21investors taking risk beyond the top stock. So I think that that's important. And I think
11:26that's a trend that would continue. We are also seeing more and more funds that are having
11:31sort of non-China mandates, Asia X China, EMX China mandates. And in that sort of scenario,
11:38India sort of is almost 25% plus of the mandate. So I think you're also seeing that trend play out.
11:44I think the global funds being underweight India is something which is true for pretty
11:51many markets in the region and EM in general, because many of these global funds tend to have
11:56a DM bias in their allocations. And part of that comes in from sort of home country bias as well,
12:00or where they are sort of domiciled. A large part of them are in Europe or actually in US.
12:06So it's not specific to India, but what we are seeing is that when a market becomes larger in
12:09indices and with decent liquidity and size, you typically start to see allocations improve.
12:15So we are therefore hopeful that given this period fundamental story and the market becoming
12:19much more liquid and bigger, you should see foreign money sort of coming back into India.
12:25And I think as we see from the foreign allocations or foreign ownership data,
12:30I mean, the foreign ownership is at 11-year low and mutual fund allocations are still conservative.
12:35So we think there's a lot of room for allocations to improve here, if earnings continue to support.
12:40If earnings continue to support. Now, fair point. There is room for growth,
12:43absolutely. Where is that growth or when that growth comes from is the question.
12:47Another factor that Indian investors and our viewers right now are focusing on and are looking
12:53at is what's happening globally, what's happening with the Fed, the whole rate cut story. So we've
12:57had a couple of data points in the last few days and it's current and new. So great to get your
13:02view on it. One, I would say is the Fed minutes, which reiterated the September rate cut hope.
13:08The other is the jobs data that has come in and two sets of it, the weekly jobs numbers and also
13:14the downward revision of jobs last year. How do you place all of these together? Because it's a
13:22picture which is still quite muddy in terms of what's happening with the U.S. economy.
13:27No, look, I mean, to sort of lay out our view there, I mean, our core view on U.S. economy is
13:33that the U.S. economy will continue to sort of expand rather than a recession scenario. So we
13:41have U.S. economy growing at sort of two to two and a half percent run rate over the next few
13:47quarters or over the second half of the year. So we think that the U.S. economy is still strong.
13:53Obviously, some conflicting data points, as you mentioned, Kamana, obviously that we had the
13:58weak sort of, we had the employment numbers picking up, we had the weak jobs report. I think
14:03our sense was that part of that was also coming in from more supply side in terms of kind of
14:09migrant laborers and all of that, as opposed to kind of a demand side weakness in the labor market
14:14data. And in fact, I think the latest U.S. economy data that came out in terms of retail sales was
14:20actually pretty decent. And so overall, I think we do think that even though recession risks have
14:27increased, we have increased our subjective probability of recession from 15 percent to 20
14:32percent. But we still think that overall the economy is in a decent shape. In terms of the
14:40Chair Powell's comment, I think they will be important because more likely they will probably
14:48continue to reiterate the fact that disinflation trends are in place, but the labor market seems
14:52to be weaker, which is sort of consistent with our overall rate cut view, which is that Fed will
14:58go in September and they will have three rate cuts this year, September, November and December.
15:04I think the market is pricing close to four rate cuts or 100 basis points cumulative this year.
15:10So we are at three cuts, but I think the Chair Powell comments would probably be consistent with
15:15the three-cut scenario. And then we have a quarterly path of 25 basis points rate cuts next
15:21year with a terminal rate of 3 to 3.25 for U.S. I'm wondering what are you looking out for, Sunil,
15:28from the speech, which we will see, of course, India Time later tonight from Chair Powell.
15:34I mean, is he really likely to give that much clarity on what could happen in September?
15:42Look, I think if Chair Powell, as I said, reiterates the fact that disinflationary
15:50trends are in place, which means there is kind of room to sort of cut rates,
15:56and at the same time say that there is some weakness in the labor markets. I think that
16:00the combination of both of those should be a cue for the market that the rate cuts are coming.
16:06I think there is an outside case that it could be even more dovish to the extent that if he says
16:13that the rates are too high, obviously, that could be an indication that the rate cuts are imminent.
16:18But our sense is that even if they broadly reiterate the message that you have inflation
16:23coming down and you have some weakness in the data, and sort of that should be a signal for
16:28the market that rate cuts are imminent. And the market, in fact, is obviously pricing in more than
16:33100 percent sort of chance for a rate cut in September. And we think in a base case, that's
16:38more likely to happen. The other thing in terms of rate cuts and equity markets, the linkage,
16:44what's important, Tamana, is that, I mean, if you look at the Fed rate cut cycles, because we get
16:48this question from investors often, is that how does markets react to Fed cuts, Asia or EM or
16:55India for that matter? I think if you go back, there are sort of eight Fed rate cut cycles going
17:00back to early 90s. Four of them have ended up in recession over the next 12 months. Four of them
17:05have ended in a non-recessionary Fed rate cuts. And it's very clear that if there is a recession
17:11scenario, despite Fed cuts, the market doesn't do as well. But in a non-recessionary Fed cut
17:16environment, that's generally good for risk assets, good for sort of Asia and emerging market
17:22equities, including India. And that should kind of spur inflow. So in our base case, as I mentioned,
17:27if we do, if you're right in terms of the fact that U.S. economy will continue to expand and you
17:33get Fed cuts starting September, I think that should be better for risk sentiment overall.
17:39And for India as well, by extension. All right. We have much more to unpack. I have to take a very
17:45small break. But Sunil Kaur also talked about U.S. elections as a factor. We'll talk more about
17:51that after the break. Going into the break, let's listen in to what Kamala Harris said. That's
17:56important because she has now officially accepted the Democratic presidential nomination at the DNC,
18:02that's their conference, and has invited voters to chart a way forward. Listen into what she said.
18:08We take a break and we come right back.
18:12On behalf of Americans like the people I grew up with, people who work hard,
18:19chase their dreams and look out for one another. On behalf of everyone whose story
18:28could only be written in the greatest nation on Earth,
18:35I accept your nomination to be president of the United States of America.
18:44You know, we've been talking about what are the big factors to watch out for that will impact
18:48markets, especially emerging markets like India in the next few months. And I think, Sunil, we
18:55would really be missing out if we didn't talk about the U.S. elections. Now, we just played
19:00out before we went into the break the comment from Kamala Harris. So the competition or the
19:06fight is clearly Trump versus Harris. Still two, two and a half months to go. And the way things
19:12are moving, you don't know how it will work out. What is the best and worst case scenario in either
19:17way in terms of U.S. markets, as well as then how that trickles down to emerging markets like India?
19:25Yeah, look, I mean, as you said, Taman, I mean, a lot could happen in the next two and a half
19:30months. I mean, the prediction markets have sort of moved all across the place in the last two
19:35months since sort of Biden pre-debate versus now Harris coming in, right? And so depending on,
19:41I mean, so if you look at the scenarios, obviously there is sort of Republican presidency versus the
19:46Democratic presidency, and then there is the divided house versus the sweep. And so there
19:51are four scenarios in between and the outcome for the asset markets would be pretty different
19:56depending on what comes out. And obviously there is a lot of uncertainty, as I said, at the moment.
20:00But I think what's true is that even though the polls are predicting a tight race, there will
20:07continue to be news flow around the U.S. elections or the next two months plus, which is why I think
20:14we have taken a generally sort of more defensive and cautious view on the markets. A lot of the
20:19client questions we are getting around is more around the potential impact of tariffs and if
20:25they come through, which markets will be more impacted, which markets will be less impacted.
20:29I think that's where people are kind of running some scenarios at the moment. What I would say,
20:34I think in context to India, I think India is still a market where the spillovers from the U.S.
20:40election should be fairly sort of limited or contained, right? And so I think when people
20:45are kind of looking across the emerging market and thinking about sort of potential tariffs,
20:52I mean, you want to be in the markets which are largely kind of domestic in nature, which are
20:56largely kind of isolated from these risks and potentially have a lower risk of tariffs if
21:03they come through. And so I think India kind of checks those boxes along with some of the
21:07other more defensive pockets in the EM. So it also therefore is a decent sort of defensive
21:13hiding spot for the next few months in that context. And I think there is a fair degree of
21:20agreement within client community on that as well. So I would say, look, I think it will probably
21:25keep markets volatile across the emerging markets in general. I mean, China is a big part, so are
21:30Korea, Taiwan, which might be impacted. Obviously, Mexico and Latin markets are also in 2018-19 were
21:39impacted from all of that. So there are a lot of the EM markets which probably are more impacted
21:43from this event. But our sense is that India has relatively less sensitivity to these risks.
21:49So it should hold up pretty resilient. So even geopolitically, we've seen a Trump administration
21:56or a republic president or a democratic president pretty even handed as far as India is concerned.
22:01But at this point, the perception seems to be that Trump perhaps good for business, good for
22:06markets, good for India. Is that necessarily the case? I just want to understand what the view is
22:10there. Is Kamala better for India or Trump? Look, I mean, we don't have strong views in terms of
22:20the actual outcome of the elections. But I would say in terms of a different scenario, as I
22:24mentioned, I think clients do think that in case of a republican presidency, that probably means
22:31lower tax rates, that probably means sort of more fiscal sort of push, which is good for growth,
22:37which should be good for sort of asset markets in general. Whereas if you see a democratic
22:43presidency, and again, depends on whether it's a divided house versus sweep in terms of what they
22:47can pass or what they can't pass. But in general, that means probably higher taxes, corporate tax
22:52rates. I mean, the Harris administration has talked about that. And that particularly may
22:57not be so great for asset markets. So again, we need to see how this plays out. But I think if
23:05there is one thing we could be certain over the next couple of months is that market volatility
23:08will probably continue to pick up, which has been the case in the last couple. Okay, just a last
23:13point, Sunil, and I know, of course, you won't talk stocks, etc. But just want to understand your
23:18view that from an Indian equities perspective, all things considered valuations, you know,
23:23company result performance, etc. What are the areas which you see with some interest right now
23:31are not constructive on? Look, I think we still like the domestic sectors in India. And so we
23:38are overweight things like autos that has done very well for us. I mean, that's a position we
23:43still hold. We are overweight industrials on the general sort of focus, continual focus from
23:47government on infrastructure. And obviously that got reiterated in the budget. We still like some
23:52of the defensive pockets, including telcos with the tariff hikes. So we do like insurance within
23:57the financials as well as a defensive place where a lot of the regulatory headwinds are behind us.
24:04So I think in general, our preference continues to be kind of domestic sectors or some of the
24:09external facing sectors. And then we also like a lot of the thematic pockets in the market,
24:15including the themes of sort of agri and allied industries, the theme of clean energy,
24:21energy security in general, defense is an area which we have been emphasizing,
24:26and this sort of broader theme of sort of make in India, PLIs, that's also something we have
24:30been reiterating. So I think beyond the headline index, where the broad view remains that the
24:35market still goes higher in 12 months on the back of underlying earnings, and we have a 26,000 target
24:41on Nifty, I think beneath the headline index, I think there are a lot of these thematic pockets,
24:45which we think will continue to have a stronger interest over a medium term.
24:50Okay. Thank you so much, Sunil. It's been an absolute pleasure
24:54speaking with you on the show. And thank you for all those in-depth responses,
24:59interesting views coming in from Goldman Sachs, especially some of the sectors that
25:03they are constructive on, industrials and auto on top of that list as well. That's all the time
25:08we have on this edition of Talking Point. Thank you so much for tuning in. We'll take a very quick
25:13break, but stay tuned. A lot more coming up on the other side on NTP Profit.