I was just reading your latest report and in terms of data points that are coming in, it seems that India is seeing a lot more FII selling versus China which is managing to actually get in those flows. What is the thought in terms of China versus India? Do you think that China will continue to see the steady inflow versus the selling that we are seeing in India?
Sunil Koul: I think you are right, in the last month or so, we have seen Chinese equity markets having a very significant rally. The market there is up 15% in the past one month, India is marginally down in the last one month. So, flows are showing that China has already seen $3 billion plus flows in the last month, while in India, it is down $2-3 billion already.
A lot of clients we are talking to are incrementally trimming some exposure in India and putting in other parts of the region, China notably but also Japan, Korea. There are a couple of things to keep in mind here. One, tactically we could see this play out for a little bit because it does seem that China equity markets are having a momentum but if you look at longer periods of history and look at China’s flows correlation to the rest of the markets, that is generally positive most of the time.
What that means is that flows in general within the region is not a zero sum game, you could still see positive inflows across the markets as long as fundamentals support it. So, we are still hopeful given the strong fundamentals in India you could see FII money coming back. That is the first point to keep in mind. The other thing I would mention is that in addition to the Asian funds and emerging market funds which are obviously doing this rotation within the region, there is also a large pool of global money which is still underweight India.
If you look at the FII allocations in India, they are still at 11-year low. Two weeks back, I was seeing investors in Europe and London and then in New York as well and I would say one thing that came out quite clear from those conversations was that people are still significantly underexposed to India, they are very keen to increase exposure in some of these thematic areas in India. I would say if you put all of that together, we still think barring some of this rotation that might happen because of China versus India, because the stronger fundamentals in India you could see FII money coming back, perhaps after the election you see that trend playing out. The last thing I would say on the flows bit is that despite, I mean we being focused about the FII flow rotation here, we also need to remember that domestic flows continue to be very supportive here, the SIP number which just came out last week continues to hit record highs, so that is another reason why the market is still sort of range bound here despite Chinese equity markets actually up close to 25% from the lows in February, that is a very strong move but India has still been able to hold on to its gains, I mean consolidating but still not fallen significantly.
You did mark that the Chinese economy is getting some momentum back in interest from the investors, but any sector or any tactical play that you would like to highlight since a lot of these sectors are related from the Indian economy as well because the metals are showing good rebound, especially in the Indian markets, the chemicals plays are doing well, some of the CDMO players are showing some strength, so with the Chinese economy opening do you believe that there are some sectors or some areas that one should look out and have a look at?
Sunil Koul: If you look at the broader listed market and I am talking about MSCI India here, the actual revenue exposure to China from India is actually very small, close to only 1%. So, if you look at the Chinese economy improving, while other markets in the region are more sensitive to it, India is one of the least sensitive in that sense though obviously, there are pockets of the market, chemicals, metals which are sensitive.If you look at what is driving the recovery in the Chinese market, there was a bit of surprise in the 1Q GDP numbers and so there were some upgrades in the market. There is a little bit of growth improvement, but more than that, the sentiment is improving and a lot of the long only is coming back to the market. Also there are supportive policies which have more to do with the shareholder reforms in China as well as some evidence of stabilisation in the property market. If you look at the earnings in China, which is another indicator of how strong the growth momentum is there, so far we are all still seeing earnings downgrades in the market, only there are select pockets of the market, notably internet and consumer bits which are seeing some modest upgrades. I would not say the economic momentum is very strong and therefore that should translate into a lot of the demand and improvement for some of the Indian sectors, but as of now, it is still sentiment that is driving it and flows that are driving it on the back of more supportive policy expected to come in in forthcoming months. So, metals and chemicals will be sensitive, but a lot of the other listed spaces in India do not have a lot of end demand coming in from China yet.
You were saying how we are seeing that recovery that is there in China. But one more point that actually comes in is that in terms of overall the spaces that you are highlighting right now. SIP flows are quite strong, domestic flows are there. You said you have spoken to FII investors; what is the concern for an FII investor in the Indian market right now? Other than elections, is there anything that is a worry?
Sunil Koul: I would not say worry. I would say high valuations is still a concern that many of them speak about. But even there, if you talk to the same people three to six months back versus when you talk to them now, there is a general recognition that the Indian markets are kind of held up pretty decently and so it is a market where valuations may still remain elevated and that is why people are kind of keen to raise exposure.
Whether it is election related risk, whether it is global risk, if you see any pullback into the market, we think that will be bought by these FII investors. What is also true is that a lot of the people already have banks in their portfolios. When we interact with investors, we try to see what are the other themes where they can raise exposure? That is where people are spending more time, whether it is the high-end consumption recovery theme, whether it is the Make in India theme, whether it is the real estate recovery theme. That is where people are trying to do more work and see if they get slightly better entry points.
We have seen a lot of these FIIs selling and month over month, we have seen the number increasing. In May as well, day after day, we see FIIs selling happening and you are of the view that post-election maybe there is a possibility of FIIs coming back. But in the near term, what are the concerns that are keeping FIIs away from the Indian markets? Do you believe that DIIs could be supportive enough to get away with the volatility in short term ahead of elections?
Sunil Koul: There is not as much concern around the election or about the market apart from maybe valuations. But it is just that the attention span has been elsewhere. So, China has been the front and centre for people right now and that might continue for a little bit more. India is seeing outflows. But if you look across the region, Japan, Korea, some other markets are also seeing that as well.
It is just that it is a very large part of the index that has moved more than 20% from its lows and that is where people are having fear of missing out (FOMO) and which is why I think we are seeing a little bit of volatility in our markets as well. But that should be tactical in nature.
Once we are beyond elections, as the numbers come through, people should start to look back at the India story. Our positive view on the market continues to come from the fact that it is a market where earnings continue to come through. It is a strong earnings delivery in the market.
We are in the middle of the reporting season that the season started a little bit softer with tech and banks, but it has kind of picked up pace and right now, from the numbers we are tracking, we are 60% to 70% through in terms of the reporting season and the numbers are coming in close, like, 12-13% year-on-year earnings growth which is what our expectation was. So, as long as you continue to see evidence that this is a market where earnings are coming through, you could see markets, FIIs coming back or investors generally coming back.
In the near term, DIIs continue to support, as we know, just looking at the year-to-date numbers, the DII flow which is both mutual funds and insurance put together, that is close to $20 billion, net inflows. FII is obviously $1.5-2 billion net outflow. So, the DIIs are more than offsetting the selling in the market at this point and we think they will continue to be the stabilising factors here.
In the emerging markets, what is that one thing that you are finding the most attractive to invest right now?
Sunil Koul: We have a barbell approach within the market. We have bets which we like from a more tactical value side of things, so we are overweight China A-share markets, we are overweight some of the North Asian markets which includes Japan and Korea, the story there is more of a tech cycle recovery and the AI theme and the value of programme. Those are the more value characteristic markets for us. And then on the longer-term structural side, we are both overweight India as well as Indonesia. That is where we are spending most of our time and that is where we have the positive overweight allocations within the Asian region.