Most of the upside will come from earnings growth: Herald Van Der Linde

The earnings growth visibility in India is the best among Asian equities, says Herald Van Der Linde, head of equity strategy, Asia Pacific, HSBC. In conversation with Samie Modak, van der Linde explains why HSBC maintains an overweight stance on India, notwithstanding concern over its expensive valuations. Edited excerpts:

How big a trigger is China’s reopening? Will it impact the equities markets in China and the rest of Asia?
 

It will impact Asian markets. In 2022, many Chinese cut back on consumption and raised their precautionary savings. These savings will perhaps be ploughed back into consumption once more, supplementing business activity. For that reason, domestic economy-oriented sectors are expected to register high-profit growth. The consumer discretionary and health care sectors in China are expected to see over 40 per cent and 60 per cent earnings growth, respectively, in 2023.

The Mainland Chinese will be able to travel again, possibly swarming shopping malls in Vietnam, Hong Kong, South Korea, and Thailand. This will allow precautionary savings to flow elsewhere.

It is also seen by markets as a signal of China intending to focus more on growth, less on regulations and Covid closures. This is generally seen as an encouraging sign.

More Chinese spending could trigger a cascading effect. It will have a telling impact on the prices of commodities and inflation, making it harder for central banks to lower interest rates.

Chinese equities have entered bull territory. Do you expect the rally to extend?
 

We do. Chinese equities are currently under-owned; most funds are underweight. They are still not expensive. While valuations have risen after the latest upmove, earnings are now being upgraded for the first time in three years. All this is indicative of more buying in Chinese equities being underway.

In 2015 and 2016, when a similar recovery in Chinese equities started, the market went up 75 per cent in two years. This time, the situation is different, but reveals the potential impact on Chinese equities when the market and sentiment turn.

Since October 2022, Indian markets have underperformed. Will India continue to be a laggard?
 

Since October 2022, we have seen two shifts in equity markets.

One, global bond yields have declined, lowering the cost of equities. This is especially positive for what we call long-duration stocks - stocks where a lot of value reside in the future. Many Chinese internet names will fit this characteristic.

Two, some funds started to anticipate China recalibrating its policies, moving away from zero-Covid policy, and unlocking its economy. To fund these purchases in China, funds started to sell markets where they were overweight - these included India and Indonesia. Both markets have struggled since Chinese equities have started to perform.   

Which markets are you underweight on and why?
 

We are underweight on markets with global exposure since global demand is expected to weaken. These include Taiwan, Singapore, and Malaysia.

India is among the markets HSBC is overweight on. Aren’t you concerned about expensive valuations here?
 

High valuation is a worry. However, we take a medium-term view of India. We expect a lot to go in the right direction for India. These include bad loans declining, consumption recovering, and investments rising. Therefore, the earnings growth visibility is clear for India. I would even argue that earnings visibility in India is the best across the region. That’s why Indian equities deserve a premium. Additionally, a lot of the reallocation from India to China has already taken place.

Do you expect a 15 per cent jump in the S&P BSE Sensex by the end of the year? Will it be on the back of earnings growth or valuation expansion?
 

India’s earnings are expected to grow 20 per cent this year. Consequently, most of the upside will come from higher earnings.

Which Indian sectors/themes are you inclined towards?
 

We prefer domestic-oriented sectors, especially consumer discretionary (think of retailers and firms with distribution channels) and banks. Banks benefit from lower non-performing loans and rising return on equity. Similar to what we witnessed in the early 2000s, this can allow for a gradual repricing of Indian banks.

Do you expect an improvement in foreign flows into India? Or will China continue to sap India’s foreign portfolio investor flows?
 

In the initial stage, China will absorb funds from India. But we believe that a lot of that rotation has already occurred. There could be a reallocation of equities from developed markets to emerging markets. This will benefit Asian markets, including India. 

What are the big risks at this juncture when it comes to investing in Asia - and India in particular?
 

There are a few risks to bear in mind that can reverse the flow into Asian equities. These are a slower-than-anticipated recovery in China or a reversal of current policies. A slower-than-anticipated decline in US inflation makes it tough for central banks in developed economies to cut interest rates in 2023. Also, China’s recovery could lead to a surge in commodity prices. And geopolitics is always a risk.