HSBC Sees Fed Rate Cut Later This Year; Picks India Over China
Clearly, inflation has moved in the opposite direction in comparison to the movement in the beginning of the year, he says.
Herald van der Linde, head of Asia equity strategy at HSBC expects the U.S. Federal Reserve to cut rates later this year, even as the central bank maintained status quo for the sixth straight time. "Our base case is that there will be rate cuts coming through but there are risks to that view," Linde said.
The Fed signaled fresh concerns about inflation as it reaffirmed it needs more evidence that price gains are cooling before cutting interest rates from a two-decade high.
Federal Reserve Chair Jerome Powel said it's unlikely the central bank’s next move would be to raise rates, saying authorities would need to see persuasive evidence that policy isn’t tight enough to bring inflation back toward the 2% target.
The market started the year with the expectations of several rate cuts, Linde said adding, "these expectations are thrown out of the window."
India Vs China
HSBC prefers India growth performance over China, but currently it is expensive. Interest in China is also picking up as the selloff is overdone, he said. "For the moment, I think China will do better than India. But if you ask me 12–24 months out, (I) would prefer India as India is a very different story," he said.
India gives you a long-term growth story with multiple growth drivers, but valuations are high. In China, it is the opposite as there is a lot of risk on growth, but valuations are really low, Linde said. "That is why we should have both in the portfolio at the moment."
Linde underscored that foreign investors moving money out of India is not a worrisome factor. Interest rates globally and bond yield in the US have gone up. Therefore, it makes sense to put money into these markets. Investors will move little money out of equities in general all around the world, and India is no exception, he said. "I'm not overly worried about that."
While the small and mid-caps have seen a huge rally, the large-cap stocks offer better value in banks and consumer companies, Linde said. "I think there is reasonable value to be found but will have to be more selective in India."
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Edited Excerpts From The Interview:
Herald, even as the Fed has decided to hold rates, bets are on whether or not there will be a rate cut at all this calendar year. Do you want to tell me the possibility of no Fed rate cut, considering the current economic data in the US?
Herald Linde: The Fed is extremely important for Asian equities. You're right.
We started this year with the market saying hey, maybe it could be as many as five. Some banks were even talking about several rate cuts this year. That's really being pushed out of the window and now some people are talking about maybe rate hikes even this year. I think that might be a bit too early to judge that.
But clearly, some of the inflation numbers have moved a bit in the opposite direction than at the beginning of the year. It looks like we might not even maybe even get rate cuts this year.
For the moment, our base case is still that there will be rate cuts coming through. But clearly there is this risk to that particular view unfolding and the market is repricing that.
Interestingly, in the month of April, we've seen FPIs actually sell out of India for the very first time in the year so far. And this is not just equities. It's debt as well.
Do you feel like rising bond yields could mean markets globally, and India in specific, could see outflows from the US investors?
Herald Linde: I think there are two things going on. It's something on China and what happens globally.
So globally, interest rates and bond yields in the US have gone up. So it makes a little bit more sense to put money into the US market. Again, I'm really talking about US money markets—putting in deposits—because there you had get 4.5%, or may be 5% on certain deposits.
So I think, we've seen money move a little bit out of equities in general, all around the world, and India is no exception. So I'm not overly worried about that. That's, I think, a near term sort of consideration for India.
The last time we spoke, you were constructive on China. But you may be even more constructive with China today. The Yen is at a record low, US bond yields are rising, India may or may not be seeing FPIs coming lock, stock, and barrel.
Where does China stand? How much of China's potential inflow could eat into India's pie?
Herald Linde: Before China, very quickly, India because we do really like India but it’s just a market that has performed so well. It's rather expensive. So we said, maybe we should wait until a slightly better time but it's a market that we effectively still like.
China's almost the opposite. China's got an enormous amount of challenges to deal with that are well-presented. Well, you guys have talked about it as well—property, economic growth, and all these sort of things.
But we've seen such a massive selloff that now a lot of people say about China that hey, maybe it is a bit overdone. And, it comes at a time when India is expensive and there are some strange things going on with the Yen.
I'm not quite sure what happened this morning exactly. It looks a little bit odd sort of a movement, but you see that the Japanese stock market is not really responding to it as it did in the past and is not rallying much higher.
So I have the impression that people are reallocating some money from Japan to China. Not so much from India really, but from Japan to China. So interest in China is really picking up.
Are you buying more in China than India or recommending more buying in China than India?
Herald Linde: At the moment, actually we like both markets. But the way we like them is very different. China, I see as a market that may do well in the near term. It's oversold. So it's a sort of a tactical adjustment that we take to China.
So, for the moment, I think it will probably do a bit better than India. But if you ask me, hey 12 or 24 months out, which market do I prefer? I would prefer India because India is a very different story.
That's why I think we should not see these markets as, you sell one and go to the other. These are like apples and oranges. They are really different and they give you a very different sort of exposure. India gives us a nice sort of long-term growth story with very, very multiple growth drivers. Not a lot of risk on growth. But valuations are high.
In China, we see the opposite, a lot of risk on growth but valuations are really low. That's why you should probably have both in your portfolio at the moment.
Let's talk about local factors because I think back home, the focus largely is on what's happening on the election front. Do you think that the markets—yourself included—are focusing more on policy continuity than actually a general election result?
Herald Linde: I think what we've seen since the beginning of the year, there's been a lot of elections coming through. Indonesia, Taiwan, has had elections, India is now in the midst of it.
It seems like the market expectation of continuity has worked in Taiwan, has worked in Indonesia, it seems like it's going to work in India as well. So the market is assuming most likely no real change in the governing party. Therefore, continuation of policies. That's considered to be kind of positive at the moment.
It's being brushed aside for a moment that there is any particular issue in equities. So most of the conversations we have about India are about valuations. It's about the growth. It's about what do individual companies do and not so much about oh, will it be a shift in policies, because maybe a new Prime Minister might come in or something like that.
Almost all sectors appear expensive, even by the most optimistic, long-term investors into India. Maybe the large cap is not as expensive as some of those broader market sector themes that we've been seeing. Is there anything that looks compelling to you at this stage?
Herald Linde: You know with India, the thing is that Indian companies always belong to the (group of) most profitable companies on planet Earth.
So you have companies that you know, generate enormous amounts of profits and don't have to invest a lot. It's a textbook sort of companies that you want to have. That explains partially the high valuations.
So we just have to accept this. It's like handbags. You have cheap handbags, you get expensive handbags. But you like the expensive one because you get better quality. So it is with Indian companies as well. So we just have to pay for that.
Irrespective of that, it doesn't mean that it's at the moment really expensive. But if you dig a little bit deeper in the market, you guys have talked about this as well. It's the smaller midcaps that are really rallying. So in the large-cap space, there is better value than I saw in banks and selective consumer names.
I think there is still reasonable value to be found but you have to be much more selective in India. That is absolutely the case at the moment.
FIIs historically have always liked the banking space in India. Bank deposits drop further, considering the increasing flow of money towards capital markets, equities, mutual funds, etc.?
What does that mean in terms of outlook for Indian banks and non-banking stocks? Market players are betting on private banking. What do you think of the whole pack—banking and non-banking?
Herald Linde: I think what we see in India, we see it in a couple of other countries as well. Indonesia early signs, Thailand's a little bit like we've seen it in Korea in the past. It is actually really powerful.
You have a lot of people that are having savings and they want to reallocate it. Normally, they put it into the banking system and the banks would lend it out. But now they're actually putting it into capital markets and bonds and equities and these sorts of things and that's a rechannelling of savings into investments domestically. That's really powerful. That's really good for the overall economy. So that's good for growth.
But for the banks, that means that maybe you have a little bit less on the deposits side, and they need to get the deposits in there to raise deposit rates. It is not so good for their margins. But given that the overall growth remains pretty robust, I'm not overly worried about this.
What we see in India is really a healthy sort of rechannelling of savings into productive assets at the moment. And that can continue for some time. And we know from other countries that it can be quite powerful to generate growth.
Built-up underperformance of decades together is helping the defence sector, to say the least. Defence stocks are trading at very high valuations. Do you have faith on this multi-year defence story that's playing out in India? If yes, are you betting big on it at this stage?
Herald Linde: The defence industry around the world is in a very different place than it was five or 10 years ago. We have intensifying rivalry between great powers—and India is one of them—around the world.
So we've seen defence stocks move around this from China, Japan, to India to Europe, everywhere, to be honest. And this is something that will probably continue to be part of our lives, intensifying rivalry between new countries, not even the right word anymore, right, but countries that have become new players on the geopolitical stage.
My country, the Netherlands, was a real big player 400 years ago, 300 years ago. We are nowhere now. So these things come and go and that newer reality, puts a lot of life into new industries and defence is one of them.
But also, for example, the tech industries that supply the chips or the cameras and all these other things, and the memory and the processing power to defence.
So there are a lot of these industries that have structural stories on fault. And from here and there, these stocks will move on near-term considerations. But in the longer run those are the sectors that we'll continue to see growth and it's up to us to figure out how you benefit from that.
Would you bet on riding the capex theme, considering the government's increased focus on Infrastructure spending, Herald?
Herald Linde: I have a slightly different view on that.
So I travelled in Tamil Nadu a couple months ago. And yes, the infrastructure is being built out, but it's still early days.
So you go from A to B. You are a little bit on the highway. Then you got to get off the highway through the paddy fields. Then you're on the highway again and then you are down on some dirt roads through the paddy fields and then there is a bit of a highway.
So they are building it out and it's not connected yet, but given two or three years time it will be connected and then the benefits from that are that you have a connection between A and B. So trade between A and B will go up, more transport, there will be hotels, and property prices will go up.
So very often, I think the way to play these sort of themes is actually buying consumer companies, or maybe companies that indirectly benefit from it over the long run. Be careful with the companies that might have a big order now but maybe not in two years’ time from now.
So while the attention very often is then straight on all the construction companies that will benefit from this, I like to look at the kind of longer lasting beneficiaries of this. And it could be a hotel, and it could be a company that offers convenience stores that just benefits from improved infrastructure around India.
Herald, for India, what do you think the theme is? Over the last decade or so it's always been about Made in India. Suddenly, the bias could be changing now to Make for India. Where would you put your money—Make for India or Make in India?
Herald Linde: Well, it looks to me it's a little bit of both. And I'm chickening out a little bit here. But India has never been a manufacturing powerhouse as China has been in the past. It was a services powerhouse but not so much manufacturing. But that seems to be changing and that lifts the domestic consumer demand.
So what we've seen in China, is happening in India in that sense as well. So you want to be in both areas. But what I really think will be an exciting industry is not AI or robotics or some of the manufacturing. It's actually because a lot of people when they have another job and they make more money, they invest that money.
That's what we just spoke about. So you're going to have Indians buying Indian assets. India buys India, if you want to put it like that. It's the re-channelling of savings that's really good for stock markets, but also good for wealth management. That's really an interesting sort of long-term growth driver as well. India will get richer and will become a bigger investment, source of investments as well. That I think is an interesting growth industry.
(Will they) buy more homes? And if yes, then I think real estate also goes on that list, right?
Herald Linde: Yeah. For example, real estate, it could be brokerages, could be wealth managers, and these sorts of things.
It could also be, for example, maybe it means that interest rates over the longer run could come down. So that's good for bonds. So there are many ways to invest in that particular theme.
Premiumisation is something that we hear about a lot. The premiumisation trend—exemplified by aspirational brands like Nykaa and Zomato—is reshaping Indian spending habits. Do you feel like that's the theme you'd like over staples because there are only that many toothbrushes and toothpaste one can buy?
Herald Linde: That’s right, but there are still a lot of Indians who would like to buy that. So I think that is happening but it will happen very differently than for example what we've seen in China.
In China, a lot of families were really small. You had a one child policy and very often two people in a family that worked. So you have, for one salary only three people and actually it’s two salaries that very often they brought in.
In India, that's not the case. The man works. Very often, the ladies stay a little more at home. Female labour participation rates are lower and families and households are bigger.
So the scope for discretionary spending will improve in India. So the premiumisation will be there but I think it will be a very slow process in India. That is good if you're in a business because that means you have more time to build out your business.
So I think, the dynamic of that premiumisation will unfold very differently than what we've seen in other parts of the world. It will be very uniquely Indian, I suspect. Does that mean you want to move away from staples? I don't really think so. But I think the key actually is here, not so much discretionary or staples. The key is distribution.
Can you get your product that Indians want to buy? Can you get that all across India, and be able to distribute that across all these different parts of India that are so incredibly Indian, so interesting and so diverse? If you can get the distribution right to reach all these people that will be the secret sauce, I would say, to success for Indian corporates.
A lot of people betting on India have usually liked IT stocks. But the outlook currently seems rather uninspiring, given the delayed rate cut from the US, political outcomes that markets worldwide are anticipating, throw in Gen AI. Do you feel like IT stocks could be the dark horses of FY25?
Herald Linde: Dark horses, maybe. There are two things. You have one of India's success stories—the IT companies. So that's a fantastic story and the Indian companies have really moved on from just call centres to become global providers of IT services.
Some banks have some more people working in India than in their home country. So that's been a real long-term success story and I don't think that will be derailed soon.
In addition to that, it's a sort of US dollar exposure. If the rupee weakens, you benefit from that as well. So that's one story.
Then you have a near-term story, which is most likely with high interest rates. The US is supposed to weaken and we've been talking about this upcoming recession for some time. We haven't seen it yet. But that could weaken. Europe is weakening.
So maybe near-term, the order flow and the demand for that will be curtailed. That's bad but the longer term story, the positioning that India's really carved out in this particular sector is not just unique, but it's really remarkable.
So is it a sector you want to have long-term exposure to? Yes, but if the US numbers come out and looks like GDP is really rolling over, and it's getting weaker, do you then want to have exposure to it? Maybe not. So it's more of a near-term consideration. I would sort of think about that.
You have indicated a couple of times that Indian markets have always been expensive, but we do look a little more expensive than our historical average.
What is a risk that you're watching out for in the Indian equity markets? What do you think could lead to a correction on Indian equities? Would it be price or time-bound?
Herald Linde: I think there's a couple of risks that we need to keep a close eye on, but none of them keeps me awake at night, so to say.
First of all, you are an importing country. You need to import energy and these sorts of things. If oil prices would shoot up, that would not be good for India. And typically, if oil prices move towards $100 people don't care about it. They go over $100, certainly everybody cares about that. So that's one thing.
I think a second risk is that we now see a lot of individual growth drivers—investment flows, consumption flows and these sorts of things. That's good.
Some of the growth that has come out of India is because your credit costs have come down. They've cleaned up balance sheets in the banks. Now, that’s really good. It allows them to expand credit, give out credit, but that will eventually come to a halt. So that's a risk factor as well.
So if the earnings growth numbers are going to disappoint, that's a second risk factor that I would be looking at. Then there would be risks that maybe India can't really control, like what happens globally, with the global macro.
If for example, we see a complete reversal in the US interest rates and the bond yields go up and stock markets go down. That would not be good for any stock market, India included, or that China is suddenly becoming so much stronger than it actually does suck up money, not just from Japan, but from other parts of the region as well and that would be India, as I mentioned.
I don't think that's a near-term risk. But these are some of the risks that I will be thinking of when it comes to Indian stocks.
What percentage of your India allocation is still on the sidelines? Do you recommend increasing cash holdings with regard to Indian equity markets? Is taking profit at higher levels at this stage on your mind?
Herald Linde: If I think about cash holdings, I think about what is the direction of the US bond yields. And I actually think that will come down. So we like equities. So I don't want to have a lot of cash, you want to be in equities.
In that sense, you want to be in Asian equities as well. I think China really has a bit of momentum developing. So I will be looking there. For India, would I put cash on the side? Probably not, to be honest. Would I buy more? Well we're overweight. So we like that exposure. But I think the momentum in the near term could come from China.
We see people putting that into Chinese equities at the moment. But I wouldn't necessarily go into cash. I think it's very dangerous to bet against Indian equity story, if you had such good earnings growth coming through. So we'd like to stay fully invested in that sense.
What sort of a number, or returns are you expecting for FY25 for Indian equity markets?
Herald Linde: Consensus is looking for something well over 20%, 24% out the top. So there's pretty decent growth coming in. That might prove a little bit too much on the high side. I think India might be slowing a little bit from last year. Maybe I'm wrong, but I suspect that we can run something between 15% to 20%. That will already be pretty good.
So I'm guessing, we're probably ending up in the high teens but consensus at the moment is looking for a little bit higher numbers. And I hope to be proven wrong and that's because I mean growth is good for equities and this is why we don't want to be in cash. We want to remain fully invested because the risk is on the upside in that sense.
What's happening in gold is also very interesting. It's very rare that you see risk-on and risk-off assets play out well at the same time. Gold is on a strong run from the start of this year. Geopolitical stress could be one key driver.
How are you approaching gold and are you looking at gold's rally as a cue to what lies ahead for risk assets in the next couple of months?
Herald Linde: No. To be honest, I don't really look at gold in that sense.
Yes, I've noticed gold is moving higher. I think there's a variety of factors that you already mentioned—geopolitical considerations, maybe bond yields coming off. So therefore, on the margin, why would you keep your money in a deposit? You put it somewhere else. Gold is an alternative.
From what I understand has been good buying in China of gold as well because if you're Chinese do you want to buy property? Maybe you're cautious. The stock market has not done very well. So people are looking, maybe for something else. Gold demand might have picked up for that particular reason as well.
So a lot of these moving parts but if I really think about hey, what should I do, for example, in Indian equities?
Gold is something I look for, because India is an importer of gold but I really look at bond yields, I really look at the growth profile in India.
So the stuff that we just spoke about earlier on the FOMC, ... What are they doing? What is the earnings growth in India? That for me are the real key drivers and gold is something that I put on the side. I don't let them determine what I do with equities.
