Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
Speaker: However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Hello from Hong Kong and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Harold van der Linde, Head of Asian Equity Strategy at HSBC.
Speaker: And I'm Fred Neumann, Chief Asia Economist.
Speaker: Harold, we're putting one of your recent reports in the spotlight today.
Speaker: The big question is, what could go wrong for Indian equities?
Speaker: Yeah, that's right.
Speaker: Indeed, Indian equities have been a hot market for a long time.
Speaker: But investors always need to be asking, well, what if?
Speaker: We've identified the risk for Indian stocks and I think it's time we take a good look at them.
Speaker: Let's do it.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: Now, when we say India has been a hot market for years, we're not kidding.
Speaker: In fact, the FTSE India has rallied for 13 out of the past 15 years.
Speaker: So, Harold, we want to really talk about people looking for this big, shiny, new emerging market and founded in India.
Speaker: And of course, the markets have done very well.
Speaker: It's one of the best performing markets globally among the major markets in the last 20 years.
Speaker: And so we certainly get asked a lot by global investors about India now much more than, say, 10 years ago.
Speaker: The question, though, is, you know, as great the story is, what are the risks here?
Speaker: Because people always talk about India as a future and 1.4 billion people and is growing rapidly and it does and it has fantastic industries and human capital and so forth.
Speaker: But what are the risks from a from a markets perspective here in India?
Speaker: What would you put at the top here if you just thought about it?
Speaker: I think there's a couple of it.
Speaker: And I think it's very important to ask these questions, not to say that you like or don't like the market, but we have to understand there's risk to all these stories because we've heard these stories before in all sorts of other markets, right?
Speaker: And at some point in time, they peter out.
Speaker: I think a key risk is that what we've seen, that the market has been very strong.
Speaker: A lot of retail investors have come in.
Speaker: They have participated, they've made money.
Speaker: And in many cases, that have led to a sort of upgrading of consumption.
Speaker: They've
Speaker: bought a bigger car or done something at home and they borrowed money as well we now see that although they're very low but non-performing loans and personal loans these things the central bank has made some noises like hey there's a lot going on there let's slow that down let's be a little bit careful there so it could well be that the kind of positive spillover effects starting to become a little bit risky we've had a quite an uneven sort of consumption story in India as well right
Speaker: Well, my first reaction to what you said is probably that's a very small sliver of the population that has benefited from rising equity valuations and borrowed money to buy a faster car.
Speaker: Because one of the key features has been actually a to India story, right?
Speaker: You have one part of India which done very well sort of the top 10, 15 percent or chief India economist Pranjul Bhandari calls this new India.
Speaker: This is the high tech sector, the financial sector.
Speaker: Well, that you
Speaker: educated people that won't find a job there.
Speaker: But then you have 85% of the economy, which has not done necessarily as great.
Speaker: And there is a lot of suffering, a lot of, you know, some people have the work cut out for themselves.
Speaker: And so there's a bit of a divergence here.
Speaker: Now, that has not held back the market in itself.
Speaker: The market has looked at these 15%.
Speaker: At what point does the market say, well,
Speaker: you know, and you can't just grow in these 15%, it's the broader economy that needs to kick into gear, or has that not been an issue in terms of earnings growth, etc.?
Speaker: No, not yet.
Speaker: It's something that markets are aware of, but it's not something that they overly worry about.
Speaker: But we see very early signs, as I mentioned, in personal loans that the central bank says, hey, let's keep a tap on these sort of things.
Speaker: Is this a risk?
Speaker: And probably it's not really a risk.
Speaker: The banks are well capitalized, they can deal with that, but
Speaker: It's a sort of the first cloud in the blue sky.
Speaker: Let's put it like that.
Speaker: What we've also seen that the banks at the same time, because everybody's investing in the stock market, that they need deposits to extend loans.
Speaker: And if nobody wants to put a deposit at your bank because the stock market gives you better returns, then you have to increase interest rates.
Speaker: So you've seen that pressure on margins is taking place as well.
Speaker: And again, the banks are in a good, strong position.
Speaker: They can deal with that.
Speaker: But you can see that's a second cloud in the sky, right?
Speaker: So there's these sort of things going on.
Speaker: I think there's also other sort of risk, climate change.
Speaker: We've had quite a hot summer in large parts of India.
Speaker: That's hitting.
Speaker: And again, that hits in particular those people that are in that 85% in India, right?
Speaker: Yeah, and that's interesting because climate change has different effects on different parts of the world and India is very exposed to it relative to other parts of the world.
Speaker: In part because the Indian agricultural sector is so dependent on these monsoon rains, these seasonal rains coming through.
Speaker: So if they are disrupted, then it immediately has implications on agriculture.
Speaker: And that's where the vast majority of Indians still earn the living.
Speaker: But there's a second element here, and that's often forgotten.
Speaker: And that is heat, heat waves, heat waves that reduce the, you know,
Speaker: But the soil can produce and reduce the yield.
Speaker: Agricultural production.
Speaker: Production and farm animals suffer quite a bit.
Speaker: And for many Indians, the main store value is probably the ox in the shed.
Speaker: And if the ox dies because of a heat wave, then obviously that destroys acids.
Speaker: Your capital.
Speaker: And so there's a degree of vulnerability, which India is trying to address through investment in alternative energy.
Speaker: But it's just it takes time.
Speaker: You can't do that before the next summer arrives.
Speaker: But is that a theme in markets, ESG, when it comes to India?
Speaker: ESG in broader sense is a theme, environmental, social and governments issue, right?
Speaker: So on the environmental issues, we have the exposure to climate change for India.
Speaker: That's a problem that they try to address.
Speaker: And as you rightly say, so they go after solar or wind and these sort of things and building that out.
Speaker: But that takes time.
Speaker: S and G are also two factors that are of importance.
Speaker: In particular, G at the moment is standing as governance in the headlines because, well, there are allegations made in newspapers that certain Indian companies have kind of irregular accounting practices.
Speaker: And that's currently being investigated.
Speaker: But there's just another small cloud on the blue sky.
Speaker: So, you know, I have three clouds on the sky.
Speaker: That's
Speaker: Which clouds on the horizon is not always bad in India because it portends rain, but that's not what you had in mind, I think.
Speaker: So the other issue that often comes up is the fact that the equity market has done very well.
Speaker: Maybe not all parts of the economy have performed as well as one would have hoped.
Speaker: And part of the reason seems to be that large companies are gaining market share.
Speaker: They're very profitable, maybe at the expense of small and medium-sized enterprises.
Speaker: That is absolutely correct.
Speaker: You see a formalization of the economy taking place.
Speaker: And that means that large listed entities that have retail network, for example, they're gaining market share over your mom-and-pop stores, Kirana stores in India.
Speaker: that can't compete and therefore close and these people have to reinvent themselves to a certain extent.
Speaker: And that's why the larger listed companies are not as much exposed to that, actually benefit from that particular process.
Speaker: And they will probably continue for some time.
Speaker: And this brings me actually to another kind of risk that is, again, it's a very small cloud in the sky and that is investments in infrastructure.
Speaker: You as an economist would say that's good news.
Speaker: That's all nice and that creates gross domestic production.
Speaker: Well, don't put words in my mouth.
Speaker: But yeah, that's what I would say.
Speaker: Well, let me ask you then.
Speaker: Do you think that's good news?
Speaker: Yes, yes.
Speaker: I would say it's good news.
Speaker: No, but what we've seen in other markets like Indonesia is that improved infrastructure also means more competition.
Speaker: A competition is good for consumers and it's good for economists in a sense, but it's not good for the companies involved.
Speaker: So we've seen in Indonesia, for example, certain kind of cozy oligopolies 20 years ago, 10 years ago even, cement, for example, three large plays that dominated it.
Speaker: Now we have Chinese, Thai and Swiss companies have come into the Indonesian markets.
Speaker: And that is a much more competitive market and the margins have come down.
Speaker: And if you look at the profitability of Indian companies, it is those that have a distribution capabilities for very simple products, shampoo, toothpaste, these sort of products.
Speaker: As long as you can distribute it, that's where you make a lot of money in India.
Speaker: But if these barriers tend to get lower, it's easier to do so.
Speaker: Other companies might jump in and say, we're going to do this too.
Speaker: And you get margin pressure.
Speaker: So from an equity point of view, that might be negative.
Speaker: So here you have it.
Speaker: You're talking about a lot of little clouds on the horizon, but I think this is a great moment to take a quick break.
Speaker: And when we want to come back, I want to ask you whether that all adds up to a major thunderstorm for the Indian economy or whether the sun will still keep shining.
Speaker: Good question.
Speaker: So, Harold, before the break, we talked about some of the risks that really are starting to develop in the Indian markets.
Speaker: Not necessarily that it will derail things, but we need to be aware of those.
Speaker: It's a great market story.
Speaker: But does that add up to you to something structural, fundamental, or is this just something you keep an eye on?
Speaker: And what excites you about India?
Speaker: Let's put it that way.
Speaker: Yeah.
Speaker: Now, I would say at the moment we've said there's a couple of clouds in the sky, but to be honest, it's still pretty sunny in that sense, right?
Speaker: But what we've seen, for example, in the last quarter, that the earnings growth that came out of India is well below where the market had expected it or well below a sort of trend growth.
Speaker: Now, that might be a seasonal thing.
Speaker: We've just spoken about the heat wave that was so prevalent in India.
Speaker: So it might be a seasonal thing and things come back again.
Speaker: But if we see another quarter and maybe a third quarter where growth is not as strong, then the market's going to say, hey, there's something bigger going on.
Speaker: The risk for India is that the individual risk that we've spoken about individually increases.
Speaker: not enough to have a major impact on the overall market.
Speaker: But if they would all come together at some particular point in time, they might have an impact on the markets.
Speaker: So it's a gathering sort of cloud, but we don't know what kind of cloud it is yet.
Speaker: Often when it comes to investment, it's also a relative game, right?
Speaker: So it depends on what happens in the rest of the world.
Speaker: To what extent is the Indian equity market also vulnerable to what happens elsewhere?
Speaker: Say, do these clouds, these small clouds you mentioned matter more or less when the US market does really well or less well?
Speaker: What's the sensitivity there?
Speaker: There is some sensitivity because some Indian companies export their services and products to the US.
Speaker: So depending on how good the US economy does, that's important to them.
Speaker: Think about IT companies that provide services or pharma companies that sell their products there.
Speaker: What is maybe even more important is simply what happens with inflation and global bond yields.
Speaker: If they come down, that's good for equity markets in general.
Speaker: But again, relatively speaking, it's positive for India.
Speaker: but also positive for all the other markets.
Speaker: And actually, there are other markets like China internet that historically have responded more positive to that.
Speaker: So on a relative basis, it's okay-ish for India.
Speaker: It doesn't stand out.
Speaker: But that's something, yeah, one of the other risks, right, that could counterbalance some of the risks that we've spoken about, a positive risk, if you want to put it like that.
Speaker: So, Fred, we've spoken about these clouds in the sky.
Speaker: For you as an economist, do they kind of add up to a thunderstorm or major headwinds?
Speaker: I wouldn't say a thunderstorm.
Speaker: It could be that the Indian economy could still be doing better.
Speaker: We're still leaving something on the table.
Speaker: To me, that's when we run, when we talk about 7% growth, it's fantastic.
Speaker: It's phenomenal.
Speaker: But we also know that economies can grow 8%, 9%, 10%.
Speaker: And given that we have such pressing issues of
Speaker: creating labor jobs in India, that we still have hundreds of millions of people who live in deep poverty in the countryside.
Speaker: We want to really see.
Speaker: They are taken off and being put into that production process.
Speaker: Yes, we want to see even more.
Speaker: So it's not that India has done phenomenally well and I think likely will continue to do quite well.
Speaker: particularly those 15% of the economy, the high-tech sector, etc.
Speaker: But we want to really see these benefits trickle down into the broader economy.
Speaker: And if it does, then 8%, 9% is really achievable.
Speaker: And that's really the shining goal.
Speaker: So it's doing well.
Speaker: I don't think it adds up to any major setback, what you described.
Speaker: We always have clouds on the horizon.
Speaker: But really, that completely blue sky with an island, a palm tree, and the sun shining, and you drink in your hand, that comes when growth is 9% or 10%.
Speaker: And India can do it, but we need to get there.
Speaker: Yeah, we've got to wait for that drink to get the drink in our hands.
Speaker: And speaking of drinks, Harold.
Speaker: Let's go for one.
Speaker: Let's go for one.
Speaker: Well, folks, that's a wrap for the podcast.
Speaker: But if you're an HSBC client, do check out our full report on the research website.
Speaker: It's called The Flying Dutchman.
Speaker: That's me.
Speaker: India, what could go wrong?
Speaker: Be sure to listen, like and subscribe to Under the Banyan Tree if you haven't already.
Speaker: And also tune in to our sister podcast from London, The Macro Brief, which is out every week.
Speaker: This is Fred and Harold signing off.
Speaker: We'll see you again next week on Under the Banyan Tree.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
