 "Herald Van Der Linde, Head of Equity Strategy for Asia Pacific at HSBC")
Just six months ago, Indian markets were investors’ favourite. However, the situation has changed dramatically. HERALD VAN DER LINDE, head of equity strategy for Asia-Pacific at HSBC, identifies rising US bond yields, the outperformance of Chinese markets, and an earnings slowdown as the primary drivers behind the current market selloff. In an interview with Samie Modak in Mumbai, van der Linde said investors should focus on sectors and stories that could benefit from the current macroeconomic environment. Edited excerpts:
A few months ago, India was the go-to market for foreign investors, but suddenly, it took a 180-degree turn. What has happened?
How quickly market sentiment can change. We’ve seen this play out in China before. Everybody wanted to be in China between 2018 and 2021, and they became wary. So, these things happen.
In India, the main attraction was very high earnings growth, which has now come under question. There’s a growing sentiment that this market needs lower multiples. At the same time, US bond yields started increasing, prompting foreign portfolio investors (FPIs) to pull money from emerging markets. This added to the malaise in Indian equities. Additionally, China started to perform very well.
From an FPI standpoint, you sell the market that is easiest to sell, and India is one of them. So, it’s a combination of earnings concerns, rising bond yields, and the attractiveness of China.
Do you see this foreign outflow stemming anytime soon?
It comes down to these three factors. If China’s outperformance reverses and investors start selling China for whatever reason, that could support Indian equities from a fund flow perspective. Second, if bond yields come down, that would be positive. And if we get clarity on actual earnings growth, that would help as well. The market is uncertain whether India's earnings growth will be 15 per cent or 10 per cent. It may take time for these factors to become clearer.
We are working with an assumption that growth is probably between 10 per cent and 15 per cent, but last quarter’s numbers were much lower. What could help India is if China’s performance turns around, we get more clarity on earnings, and US bond yields come down. The trajectory of US bond yields is crucial. Money flows into the US if yields are high, and if they come down, it makes sense to invest elsewhere.
Another factor is domestic monetary policy, which has been restrictive for many years due to high inflation. Now that inflation is coming down and is within the central bank’s target range, a less restrictive monetary policy could help banks. We believe restrictive monetary policy has contributed to slowing growth in recent quarters. If central banks remain open to currency pressure and prioritise growth, they still have room to cut rates.
Do you expect US bond yields to soften anytime soon?
If the US imposes tariffs, it could push domestic inflation higher, prompting the central bank to raise rates, which would lead to higher bond yields. On the other hand, if the US economy slows down in the near term and unemployment rises, bond yields could fall. The market is currently caught between these two scenarios. Bond yields have come down slightly, but not meaningfully. If they decline further, that would be quite positive for Asian equities, including India.
What’s the outlook for China?
Our view is that Chinese equities are not only incredibly cheap but also that growth is probably better than expected. There is an enormous amount of cash on the sidelines — $22 trillion in Mainland China. If confidence returns and some of this money flows into equities, it could be quite positive. The combination of low valuations, decent growth, and ample cash on the sidelines makes us believe this market could perform very well.
How does your Asia positioning look at the moment?
We are neutral on India and South Korea, overweight on China, Indonesia, and Hong Kong, and underweight on Taiwan and Japan. Instead of looking at India from a market capitalisation perspective, we want to focus on growth stories or sectors that benefit from the current macro environment.
For India, are there any themes that stand out?
One is tech, which benefits from a weak currency. The recent earnings season also showed an improving growth outlook in the US. Within the consumer sector, we prefer discretionary over staples due to more attractive valuations. Some automotive companies are targeting high-growth sectors overseas, despite weak domestic demand. Hospitals are another sector we like because of their long-term structural growth story. We also favour private banks, where valuations are attractive and could benefit from increased liquidity.
Any sectors you would like to avoid?
Capital goods and infrastructure. With the recent Budget, the focus has shifted from infrastructure to domestic consumption, so we might see some rotation out of these sectors.
Any other global risks that investors should be mindful of?
Tariffs on China are a significant concern. If the US imposes more tariffs, it could be inflationary and affect stock markets. The direction of bond yields is also crucial. If the Federal Reserve can’t cut interest rates due to inflationary pressures, it could lead to a stronger dollar, which would not be good for Asian equities.
Do you see the ongoing drawdown stretching further?
It depends on the factors we discussed earlier. If China's strong performance reverses, bond yields come down, and the earnings picture improves, investors could return to India. However, if China continues to rally and US bond yields move higher, even a further 10 per cent decline may not attract investors.
