Overweight on India, Julius Baer sees more room for bulls as local funds outrun foreign flows

Mark Matthews

The rise of Indian markets will likely continue, supported by local buying, Mark Matthews, Head of Research, Asia for Julius Baer, told Moneycontrol in an exclusive interview. Local funds have become a more powerful force in Indian markets than foreign flows, he said while adding his outlook on other factors which influence the India growth story, the trajectory of the rupee and midcap stocks.

Here is part one of the conversation:

What does the trajectory of the dollar mean for fund flows in an emerging market?

Well, I feel the asset classes are outdated and there's just too much going on within these countries. China, India, Brazil, Russia and all of the smaller ones. I'll just start with China, which is the largest, of course. So it is the one market that is not doing well this year and I can't see why that's going to change. The only thing that would prompt them to change is if they had a very bad deflation and they don't have that. The most recent inflation reading was slightly positive. I think you'd have to see things get much much worse in China for any kind of major stimulus on the part of the government. Next is clearly India, which is breaking out after a consolidation since 2021, the major indices are breaking out and I think it's a good story and will continue to move higher. Russia is not investable, smaller ones are hard to keep on top of. So putting it all together, India will be the one that attracts the most attention.

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What is your outlook for India?

We are overweight in India and we think it will continue to go up. Despite the foreign fund flows, the more powerful force is the local funds. When you get the local funds to a certain size, it becomes a very big cushion for the market and the systematic investment plans that have been rising over the last few years and the number of accounts that have been opened, that will continue as the per capita income of India rises. It should because the working-age population is getting bigger and you have sectors of the economy that are growing strongly, like technology which pay more. So local buying is a very powerful force and there are countries we can look at. Australia for example, or Malaysia have these big retirement plans where every month people are putting a little money in the equity market.

There has been a lot of bullishness around India. What do you perceive as the most important factor that will have an enduring impact on the India growth story?

It's hard to choose because there's a lot of good things happening. If I had to choose one, I think it is that the reforms that have allowed the government to build physical infrastructure with improved tax collection. There are highways, airports, ports, etc that can accommodate the manufacturing sector in a much more meaningful way than before. India was an agrarian slash services story before. But now there's a very real chance that you can get big manufacturing in India that can be used for the domestic market, which will bring down imports and therefore, the current account deficit. They could also be exports and that would be a very powerful thing for rectifying the current account into a surplus and in turn, would be a beneficial force for the rupee. The thing that usually keeps global investors away from emerging markets is that they don't want to lose money in the currency. Case in point, India. The rupee has lost over 50 percent of its value over the last few decades. If that's a thing of the past and we continue to see stability in rupee, then I think you would naturally see much more foreign fund flows into the country.

What is the long-term trajectory you see for the rupee and is that having a substantial impact on the way foreign investors view India?

The longer the rupee is stable, the more that will be noticed and it takes a few years to change people's views on a currency which has been in a sort of structural decline for as long as the rupee. If manufacturing really will become a major sector and driver of the economy, then I think it's absolutely intuitive that the rupee not only stops going down but possibly even becomes a currency that goes up if India increases its efficiency and productivity, becoming less reliant on oil.

Tell me about how large foreign institutions are really looking at asset allocation now. Because China is a big part of the emerging market index, and lot of money is flowing away from passively managed funds to avoid China.

If you don't want to own China, you have to buy emerging markets ex-China index and you can't just buy an emerging market ETF because you'll be owning a lot of China and I think those products are being created now. There are emerging market ex-China ETFs and managed funds. With the Fed funds rate having gone from zero to five percent in 18 months there are lots of bonds which are attractive for the first time in over a decade and so the bond market actually is taking a lot of oxygen away from the stock market simply because you're getting very good yields across the spectrum. Including high-quality investment-grade corporate bonds where obviously the risk and the volatility are much lower than with stocks.

Are there any specific sectors or themes that you're particularly bullish on?

I suppose that we like the banks because their non-performing assets have been brought down to a very low level and the capacity utilisation for the corporate sector is around 80 percent. So there's a genuine demand for loans and the banks are in a position now to make them. So there's a credit cycle underway, which we think will persist. Then, infrastructure, because the government continues to roll out improvements in infrastructure. Lastly, the consumer sector, as per capita GDP last year was about $2,600 and by the end of this decade should be about $3,700. If that happens then consumption is also a good space to be in.

Are midcaps an attractive opportunity from a foreign investor perspective?

They are attractive because their growth profile is typically superior to the large-cap simply because their base is smaller. But I would say that every stock no matter how big or small it is requires an equal amount of work and people have only so much time every day to look at things. So foreigners will probably not be the ones buying those because they don't have enough time to look at midcaps all around the world. I imagine they would leave that to local fund managers to do rather than try to do it themselves. They probably do not want to have a lot of midcaps because midcaps tend to be perceived as more speculative and cyclical and foreigners want to buy more structural long-term stories.