Foreign Funds See India And China As Separate Entities: HSBC's Herald Van Der Linde

Herald Van Der Linde: To be honest, I haven't really changed that much to be very frank. Thanks for having me again. So, at the beginning of the year, we spoke and the view of India is that the outlook for India over the next couple of years is actually a pretty good one. There's pretty good growth coming through. GDP numbers are good, earnings numbers are good, etc.

The problem is the valuations and certain unevenness in the market. That's one risk. And the other risk is the flow of money from India to China, in case China starts to rally.

Now, first on that unevenness. Valuations are high but what we see now is that the small-cap stocks are underperforming, the larger caps are picking up and I think that's a very healthy development. I think that's where the value lies in this market. So, I think, the market is going to rally a lot further. Probably, it is going to gradually tick higher and that's helped by global macro. But what I find encouraging as well is that when China started to rally over the last couple of weeks or so, the money didn't come out from India. It came from outside the region. So that means that people are separating at least at this stage—that China and India are different stories and I think that might well continue. So I remain constructive on India. It's probably not going to be a sharp rally up from here but maybe gradually ticking higher.

Herald Van Der Linde: In the past, we could clearly see that if China rallied, money was taken out of India. And if people didn't want to be in China, they went back to India. That is where that first of the second argument came from.

But if you look at positioning now, foreign investors positioning in India, it's actually not overly aggressive. But they've gone to Japan and they've gone to Korea, for a variety of reasons we don't really have to go into. But that's where they are hiding at the moment. My suspicion is that if China rallies, that money could come from Japan, from Korea, or from outside the region, and then they don't have to sell India.

So, I think, India is not as much at risk of outflows as what we've seen over the last 12-18 months. That's a little bit different. The source of funding could be different now. So I would argue that maybe that first argument, you made that maybe it's a bit different, this is going to be better/valid.

Herald Van Der Linde: I think, in equities at least, we will continue to be beholden and what happens in the global markets to a very large extent with equities for a very simple reason that India is a big market, but when you look at the U.S. markets, it is so much bigger.

So we have size issues in global equities. The US market dominates most markets. And then actually, China dominates. So what happens in those markets can unleash massive flows that have a real big impact. However, while you therefore remain connected with what happens in the other equity markets, if you have a decent story to tell about the stock market in terms of earnings growth and these sorts of things, you can go on your own. Now you have a fantastic chart here. India versus China versus emerging markets. And India follows emerging markets sometimes, but sometimes also just goes off and that's been particularly since the beginning of 2023.

So I think India's story is that we've seen how good earnings growth, visible earnings growth, also, earnings growth is not so dependent on the macro factors, what happens with the central bank and what they do in India and interest rates. That sort of earnings growth allows you to stand out from the crowd and that is good.

But if, for example, global interest rates were to go up, inflation in the U.S. rose and if the U.S. markets were to correct significantly, if that was to happen, I don't think India can say or we can expect the markets to go up. No. You, we, all emerging markets will follow the U.S. up to a certain extent.

Herald Van Der Linde: Okay. So I think rates will have come down at some point in time. The question is the timing of it. Why do rates have to come down? Just to clarify that maybe first is that, at these elevated interest rates, at some point in time, we will see the impact of that. The whole idea of raising interest rates is to slow down economic activity and that has happened much slower than we anticipated for a variety of reasons—the U.S. consumer doesn't have as much debt and these sort of things. But it does impact overall economic activity. So we're going to see that slow.

So I think we cannot expect interest rates to remain at these levels for a very, very long time, let’s sat for the next 12-18 months or so. Then the question is okay, debt will come down, but when and how fast. We've been in the camp that will probably come down a little bit slower and later than what people anticipated at least at the beginning of this year and we've seen a little bit of a recalibration in the market. At the beginning of the year, you saw bond yields come down and markets say, hey they going to cut interest rates. And then it was like, oh, maybe not and the yields drifted higher a little bit again. Now they're coming off again.

So I think, somewhere in the middle of this year, we're going to see the first rate cuts and then, gradually in the second half of the year, that will continue into the next calendar year as well. So it will be a slow process. But this will be good for equities in general and this is why we are positive on global equities in that sense. And it is particularly good for emerging markets, and particularly for emerging markets such as India, where growth is good. But there will be a slow process and maybe a bit slower than what the market is anticipating.

Herald Van Der Linde: Over the last decade, the average interest rate has been very, very low. The question is, were we, maybe, even below sort of there is some kind of magical invisible average number. Technically we call it our star. It doesn't matter too much. But at that number, we don't know what it is. But that's where interest rates hover around. Probably, two or three years ago when interest rates were really low and I remember in the U.S. the bond yields were about 0.5%, that was probably below that level, but at the moment we are above it. So there's a wide gap. So somewhere in the middle, is where we end up. So my suspicion is that we're going to see a gradual decline towards what we call our star—that average level—but we're talking about 2.5% maybe 3%. At the moment, we're at 4%. So we are moving in that direction.

Herald Van Der Linde: If you look at the elections that we've had, so far, I'm focusing in particular on Taiwan and Indonesia.

In Taiwan, we had an election and when the results came out, it was like, okay, that's fine and in Indonesia, you have a bit of a similar response. The thing is that the elections that take place in Asia, the market is anticipating that it will not lead to any significant or immediate change in policies that will impact the profits of the companies that are listed. And I think that's the underlying assumption that is made, for example, in India as well. So when it comes to flow, I think the elections, although they're very headline grabbing, are not really making a stir.

What could create a stir, when it comes to flow, is what happens in Japan. Japan has got ultra low interest rates. There are signs that it looks like in March or probably in April, they're going to change that to raise interest rates. The Japanese market has done well because of these low interest rates. So on the margin, that means that a tailwind is going to shift towards a headwind. That money might flow out of Japan. Then the question is, if that happens, where does it go to. And it could of course go to the U.S., but the U.S. market has rallied already. It could go to Asia. It could stay in Asia. There's good reason to believe that they delivered. It could go to China but we'll also run, for example, move to India. So that's how we're looking at flows, not just the elections, but also how people are positioned across the region.

Herald Van Der Linde: This could probably happen probably around April. The Yen has been very weak because of the lower interest rate. Basically, there's a policy to keep interest rates at about zero. So as the U.S. interest rates went up, the Yen weakened because why would you hold Yen and the U.S. dollar is more attractive. But a weaker Yen is good for exports. In Japan, the stock market's got a lot of exports. So they're done well on this. But this can go in reverse if the Japanese raise interest rates and the Americans are talking about lowering it. That's what we earlier did.

Then, suddenly, the Yen might not weaken. It might strengthen. That's actually what we think could happen in the second half of the year, or maybe after April already. Maybe that's a gradual process. But then that support for the exports there might fall away. And people might say, well, Japan has rallied already. It's been a great story. Should I hold on to this? Maybe not. If they do so and they take the money out, the question is, where do they go? You could, in the past, put it in the U.S. with high interest rates, but those rates are coming down. You can put it in the U.S. market but that one has rallied already. But then you could say, why not emerging markets. Within emerging markets, either China or India could welcome up. So that will be an interesting dynamic that could start to take place in about a month's time or so.

Herald Van Der Linde: Somebody told me an interesting statistic—that if the margin of error between the two parties in the US is very small, the independents will make it up. But a large group of the independents in the U.S. have not made up their mind yet.

So all the polls we see that, particular person told me, we should take them with a grain of salt. That means that the markets, if that is the case, it is very difficult to make a forecast of who's going to win and what the policy implications are. We just don't know yet.

What I do think, in Asia, we need to assume that whoever wins in the U.S., that the US and particular China are in an antagonistic sort of relationship. That is nothing new that has been taking place for the last 6-7 years now. So that will basically continue, whoever wins. That's the sort of assumption that I think I made but a lot of people make.

And then the question is, can equity markets perform under that. And actually, in the previous episodes on the Biden but also under President Trump, the Chinese stock markets actually performed pretty good, at least a part of these periods. So we have to look at what happens with the profits of these companies. So it's difficult to say anything about this at the moment. It's too early to make clear statements in my view. Whoever wins, in the U.S., is probably going to continue to the sort of antagonistic relationship that the U.S. and China have. There is nothing new.

And then we come back to China and the rest of Asia. Can we still grow? And we can probably still continue to grow, maybe slightly different. Certain sectors will differ. So it's going to be the sectors within the market that we have to look at, not the overall market so much. And India is probably somewhat isolated from this anyway. So that's a positive I guess, for India.

Herald van Der Linde: I'm not a political forecaster. For me, it's very difficult to forecast these sorts of things in markets, but the underlying assumption that I think the markets are making...

Herald Van Der Linde: I think it's been baked in. That's actually what I want to say. We, as markets are not good at making the political forecast but the assumption is that the policies will continue in India. Unless we get clear indications, this is not the case for whatever reason.

And also, I think if you look at the underlying drivers of growth in India, for the corporates, they're not too overly sensitive towards policies. For example, formal retail is gaining market share over informal retail. Now you can raise interest rates, you can lower interest rates, you can have a weak rupee, you can have a strong rupee, gold prices go up and down, but that process probably continues. So it's these sort of structural growth stories that are unfolding in India that are not really macro sensitive. That is, I think, one of the reasons why India is so attractive. The risk-to-growth is not very high.

Herald Van Der Linde: So I think one theme is if global interest rates go down, certain sectors will benefit from this. For example, I'm talking about the whole region, for example, property and these sorts of sectors benefit from lower rates, but banks do not necessarily benefit from that. So that's one thing I would look at.

I think there are other things. One of them, I mentioned, is a continuation of formal retail gaining market share over informal retail in large parts of Asia.

Third thing I can think of is, for example, India's great example. I was in Tamil Nadu about six months ago for a holiday. They have highways. You drive for 25 km on a highway and then suddenly it stops. You're going to go off. Infrastructure has been built up, but it's not completed yet. So when that completes, you will have all sorts of benefits that come from that. Transport costs will come down, it's easy to get from A to B, tourism, travel between cities picks up and all these sorts of things and all sorts of companies can benefit from that. And again, that's consumer companies, could be property companies, hotels, could be all these sort of things. That's something I'm looking for, as well as a theme, across the whole of the region. This is in India, but this is also the case in Thailand or Indonesia, for example.

And then, there are a couple of other themes but they are more related to North Asia—about smaller families, lower birth rates, technology changes, AI and these sorts of things.