Herald Van Der Linde, head of equity strategy, Asia-Pacific, HSBC believes most economists are overweight on India as there are more uncertainties in other larger markets like China and Korea. He also feels the emerging markets that are more sensitive to foreign flows will see faster depreciation.
In an interview to CNBC-TV18, Linde says he is overweight on China at the moment due to cheap valuations. "The average company in China is trading at about half the price of the multiple in India," he adds.
Meanwhile, he will review the overweight stance on Indian market and is bullish on healthcare, software and private banks. He feels valuations look reasonable for IT sector, the outlook for growth is normal and they also benefit from the weakness in the currency.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: How mutual funds are positioned across the Asian region and on a relative basis, in which market exposure seems to be declining the most at this point?
A: If you look at sector and country regions, across the region how mutual funds are positioned - there is a particular trend, which has been going on, but is changing gradually. People have focused on markets where growth is visible. Philippines is the fastest growing economy at the moment and until a couple of months ago mutual funds were maximum overweight on the Philippines levels, we haven’t seen in the last five-six years.
India fits in there as well. We have seen people being maximum overweight on India as well. That is partially a reflection of the uncertainties in other larger markets like China and Korea. Korea due to the political issues earlier this year and China for the domestic growth issues.
If you are a large fund where else do you go in the region? Some of the other markets are too small, so India is then a place they need to hide in.
Q: How would things pan out in the next quarter? One parameter that has clearly deteriorated for India could be the currency, which can also work positive if you have not yet entered. But the 2 percent currency depreciation in the past two-two and half weeks makes the current account deficit (CAD) and the fiscal deficit much more uncomfortable. Will that change the outlook on the economy itself or will it be too small and too incremental?
A: No, it does. But there is actually a bigger picture, a bigger story at play, which we need to take a look at and then we can go down. The real big issue is that markets over the last couple of years have been driven by central banks the Fed, Japan, to a lesser extent what happened in Europe and the question now is when will the Fed in particular start to taper off this quantitative easing (QE).
If we are going to stage whereby, it is going to be quite soon, the dollar will strengthen and emerging market currencies will weaken in general and this is what is happening at the moment.
There will be a stage maybe later in the year when we suddenly realise that the underlying growth is maybe not as strong as we expect. Then we swing back emerging markets and may bounce back and the dollar weakens a bit again. We have seen this in some other currencies over the last couple of weeks.
Within that, you also see people moving towards cyclicals when the world looks better and the Fed might take gas off the pedal or move back into defensives.
So, all these things are very much related to a particular theme. At the moment, maybe it is going to happen sooner than what the market initially expected. The emerging market currencies will weaken and in particular the countries which are very sensitive and reliant on foreign flows, Indonesia and India are two examples in Asia, they will see their currencies depreciate a bit faster and the pressure will be higher there.
Q: You are underweight on Taiwan, India and Philippines, while you are overweight on China, Indonesia and Singapore. Specifically with respect to India, why are you underweight currently? You were mentioning a couple of these macro factors, but for the rest of the year what is the rationale behind being underweight on India?
A: I am currently in India to actually review that particular position as well.
Q: Will you review it? What is the sense you are getting?
A: We just started. Today is the first day. We have been overweight on China, which is a very cheap market. The average company in China is trading at about half the price of the multiple in India. So, it is a very cheap market.
Although, there are growth problems in China, the current levels are so low that we cannot ignore that particular market. Then we also try to go as much as possible into Association of Southeast Asian Nations (ASEAN) and we like there Indonesia, Singapore, and Thailand in the past, but at the moment Indonesia.
Philippines have always been different because it is the most expensive market in the world, if not the second most expensive. It competes with Mexico in that sense. So, it is not a market I want to touch because at over 20 times PE it is where India was trading. Since 2007, the problem is companies can grow, but if the multiples come down you are not making any money in investing in those markets and therefore, I try to shy away from Philippines.
But the rest of the story for us has been China plus ASEAN. The two markets where we have to think about what we will do are India and Korea. Korea is very cheap and economy is quite weak. In India, the underlying economy is not that strong either.
So that is where we get the reassess as well and one of the issues with India is that everybody seems to be maximum overweight, lot of these mutual funds are already maximum overweight on India, how much more foreign buying there can be? So, I would also like to explore the domestic appetite for equities as well.
Q: Your review was triggered by a fear that perhaps people are satiated with India or was it triggered because some fundamentals are improving? Are you coming with a fundamentally negative or positive bias when you come to review your state?
A: I initially came with a fundamentally cautious bias because the economic data was not looking too good. Also we moved more cautious on India two days before they announced the reforms which was late October. So, initially that did not do very well because there was a lot of Euphoria but when we talked about this, and came back in February to reassess our position. I didn't have the feeling that a lot will be happening.
There is a lot of euphoria about a particular theme, there is going to be enormous amount of reform but implementing that reform is much more difficult in reality and therefore, markets are disappointed a bit. So, we decided at that point of time we are going to stay cautious on this.
Most people don’t talk about the reform anymore. It will happen, so may be we are overshooting a little bit in that sense. So, that is something we are trying to explore at the moment as well.
We were cautious on the macro side and that cautiousness still persists. However, the real issue for me is about the foreign funds positioning and are domestic funds willing to come back. At these levels we are going to pick up some more on the equity side.
Q: We were looking at some data from Emerging Portfolio Fund Research (EPFR) where they were tracking what emerging market fund redemptions look like. There is redemption of USD 3 billion in May from emerging market funds which is the highest since 2011. What are you noticing in terms of emerging market fund redemptions in general and specifically with regards to India, has the pace slowed down of foreign institutional investors (FIIs) putting in money?
A: I think it has. It seems to be the least and the data shows it. Part of it is what happens in the US. Some of the data that is coming through in the US looks pretty okay and the US markets have been on a roll since the beginning of the year and that has absorbed enormous amount of money. Small changes in that market absorb enormous amount of capital.
Then, if you look at the emerging markets like Brazil, Russia, India, China & South Africa (BRICS), we see a lack of reform. People were hoping for more reform but Russia doesn’t seem to be the case. I am not an expert on Brazil, but there is not too much happening there either.
India and China are at least having a discussion about the economic issues. China says it has a bigger plan to be unveiled over autumn and so, we are going to see what it is. For India we will have to go over the elections before we get some more momentum in that particular issue.
Therefore, the sentiment in general in emerging markets has not been phenomenally good. Markets have underperformed and redemptions have come in.
Q: You may be underweight on India but would you overweight any specific sector like information technology (IT) which benefits from a rupee depreciation? Also, in case of commodities – one would have thought that crude would be as much abandoned when you see a risk off but we have seen crude performing better because of the US jobs data indicating more strength in the US economy, perhaps even the Japanese economy. In any case, how are you looking at commodities and in particular crude?
A: We have liked healthcare, software. Valuations look reasonable for IT sectors, the outlook for growth is okay and also they benefit from the weakness in the currency.
We also like the private sector banks. Valuations look reasonable as well. You don’t have negative effect but some of the tick up asset deterioration across the country. If some reform would come through or capex spending may be after elections that would come into that sector as well, so, we like those sectors in particular.
When it comes to commodities, there is a range of factors at play, but in general with commodities we see supply effects coming through. This is interesting because so far although the US has been quite strong commodity prices around the world have not gone back to say crude USD 150 or something like that. I am not an expert on crude as such but in a lot of other commodities we see a positive supply reaction coming through. So, there is a lot of iron ore and nickel, steel, it’s too much of that in the world and that keeps commodity prices at bay to certain extent.
It is not much prominent in crude necessarily. As such recovery in the US will imply that the crude prices could move a bit higher but for example in steel and other commodities there is plenty of it around. That helps emerging markets indicating that costs can keep margins healthy at least that’s what we hope for.