The stimulus blitz in China and strengthening of the dollar—key triggers for the record selloff by global funds—will not sustain for long, wealth management firm Julius Baer's Head of Research, Asia, Mark Matthews said, indicating outflows should pause soon.
The 180-degree turn China made on its economic policy, and strengthening of the dollar since September mainly led to foreign institutional investors exiting the market, Matthews told NDTV Profit. "It is difficult for Asian markets to attract FPI investments when the US dollar is strengthening."
The dollar index typically doesn't go higher than its current level of 107, and it is moving into overvalued territory, Matthews said. Further, the China story has run out a bit, and additional stimulus won't have the magnitude that was seen after the global financial crises, he said. "Any incremental stimulus is not going to drive a lot of money into China."
"Both of these catalysts were the outflows we have seen, and I don't see them sustaining themselves," Matthews said. However, he had a word of caution and said investors had their own rationale.
Global funds offloaded Rs 5,321 crore worth equities on Thursday, taking the net tally to Rs 1.65 lakh crore in the last 37 sessions.
The dollar index, which tracks the performance of the greenback against a basket of 10 leading global currencies, was trading 0.19% higher at 107.17 as of 12:10 p.m.
He added that 80% of Chinese household income is in residential real estate and that the prices in the sector should bottom out soon. "Chinese consumer sentiment should improve on recovery in real estate."
In India, Matthews said that he would look at rural consumption and private sector banks for allocating fresh capital currently. "I'm not concerned about earnings downgrades." It's "nice" the market has pulled back, and "in fact it makes it look quite attractive relative to most other markets," he said.
Other Asian markets are valued twice as much as the Indian market and will be looking at the domestic stocks when allocating to fresh money, he said.
The reason to be optimistic despite earnings revisions is that they will be getting revised back again, he said. Improved government spending, a good Rabi season, and the wedding season will provide an impetus to consumer spending, he said.
Economic growth will be 6% next year and over 6% in the year after that, which should translate into double-digit earnings growth, he said. "I think India looks absolutely fine, and in fact good."
Mark Matthews, managing director at Julius Baer (Source: NDTV Profit)
Mark Matthews, managing director at Julius Baer (Source: NDTV Profit)
'Geopolitical Tensions To Ease When Trump Takes Over Presidency'
Mark Matthews is "not worried" about the geopolitical tensions with the escalating Russia-Ukraine conflict as "often, outgoing Presidents tie up incoming presidents."
Russia said it had launched a new kind of ballistic missile into Ukraine, a day after the latter fired British cruise missiles at military targets inside Russia. This follows the decision by Joe Biden’s administration to approve Kyiv’s limited use of the weapons, and Russian President Vladimir Putin signing a decree allowing Russia to fire nuclear weapons.
"Putin is not going to take the bait, and has to respond in some fashion, which clearly he did." Matthews doesn't see this evolving to a point where it becomes a drag on the global economy.
Any negative cues that take the stock market down are the ones that will have an impact on the economy, he said. "This one, I don't think will affect the economy." With Donald Trump in the White House, chances are higher that the Ukraine-Russia situation will de-escalate, he said.
Wall Street is on the verge of a bubble territory, Matthews said. There are market signals that the animal spirit is running very strongly. "We are moving into territory that is beyond fair value."
Watch The Conversation Here
Here Are The Excerpts
Let's start with, I think, what is top of mind, and this is all the developments in the last 48 hours, the escalation very, very suddenly, and exchange of missiles between Ukraine and Russia. How much of a worry is this, because we've seen some reaction coming in from crude and gold, but nothing over the top?
Mark Matthews: I'm not worried. Often outgoing presidents try to tie the incoming president into a course of action. That happened when George Bush Sr. was leaving office back in 1992, he sent U.S troops to Somalia because he wanted to get Clinton tied in there and he felt that Clinton was an isolationist, whereas he was obviously, as the former director of the CIA, quite the opposite. So it's pretty obvious that the Biden administration is trying to get the U.S more tied into the Ukraine situation.
My own sense is that Putin is not going to take the bait. He didn't in August when the Ukrainians invaded the Kursk Oblast of Russia, which borders Ukraine. He has to respond in some fashion, which clearly he did. But I don't see this evolving to a point where it becomes a drag on the global economy. Quite the contrary, the economic surprise indices in all major economies are on the up, and in all except Japan, the economic data which is being released is beating consensus expectations.
So when we look back and we see these kinds of events. I would say there's roughly 50 of them since World War II you count as major geopolitical events, the ones that take the stock market down are the ones that have an impact on the economy and this one, I do not think, well, certainly, so far, it has not had an impact on the economy, but I don't think it will either, because when Trump does get into office, the chances are higher than lower that the Ukraine situation will de-escalate.
So many interesting things you've said, Mark, and I want to follow up on a couple of them. One is, and this is something that everyone is whispering about, talking about, guessing, but you've said it front and centre that the actions by the Biden administration are aimed at tying up his successor, that Trump comes in, and then he has to deal with this entire mess. It's astonishing to expect an outgoing President or sitting President of the United States putting the entire world at risk for political gain, but that's exactly what's happening, right?
Mark Matthews: I don't think it's astonishing. As I said, it happened all the time before, so it's nothing new. What more can I say about it? I don't think it's astonishing, and I think the market's reaction is showing you that too. It's taking it.
I would say, astonishing from the point of view of not that it has precedent, but we've normalised it to this extent, and maybe in that sense. But the second part of my question is, why are you so sure that Trump will be able to come in by January 20th and de-escalate? There's a lot of time between now and January 20th, and we've seen the escalation already in the last 48 hours?
Mark Matthews: You're right, and I'm not so sure, because sometimes the national security establishment, when it doesn't like the directives of the President, tends to do other things in clandestine ways. But overall, my sense is that the trend is toward a world where these sorts of hot places de-escalate, because we all know that Trump is more of an isolationist than an expansionist.
So I would just think that, as I said, the chances are higher than they are lower, that that will have de-escalation on the geopolitical front next year and rather than escalation.
So well, we'll keep the politics aside. Let's talk about what we know. You've got a solid U.S economy, and you're got a very impressive set of earnings. Let's not forget, two quarters ago, in May this year, U.S markets were selling off because earnings were disappointing. So all of this is relative and in perspective. You have a policy or a President who's going to come in and who's been called out to be inflationary for the U.S economy. What does this mean for the Fed in terms of a rate cut and what does this mean for other other Central banks, globally, India included?
Mark Matthews: We have very little clarity on the trajectory for interest rates now, because of all of that you've just elucidated. So whereas we had previously been looking for a terminal rate to come sometime in 2026 at around the 3.5% level on the Fed funds rate, we don't have that visibility now. So we're saying that we think the Fed will cut not this, not in December, but in January and March, but then after March, we have no clarity. So for now, we've pencilled in a Fed funds rate at four and a quarter, and from there, we'll just have to see. Probably it will go down some more, but I can't say when the next cut will be after that. We'll have a lot more visibility by the time we get to March, we'll know what the cabinet looks like, what this second Trump administration is looking like.
Too many moving parts now to save for with any degree of reliability. But clearly the markets are not that fussed about it. I think we're in a melt up actually now with the stock market. There's a few little signs of that, Bitcoin is about to go over $100,000. I think there was an auction where Sotheby's banana stuck to a wall with duct tape for $6.2 million. It was a cryptocurrency entrepreneur who bought it. So to me, these are classic signs of a market which has the animal spirits running very strongly, and I think we're melting up, but I think we're also moving into territory which is beyond fair value.
Now, frequently markets do go away into what is beyond fair value. They go into bubbles. I would just say we're on the verge of moving into that kind of territory today.
That, of course, is with regard to what's happening on Wall Street. I think Mark, you may agree with me here, like I said in May 2024 the Nasdaq and the S&P hit were hit quite hard, and we were talking about a recession and the U.S economy slowing down, and consumption looking distraught, very different from what you and me just talked about right now. I feel like India is a little bit of in a similar situation, we've had earnings that are disappointing.
Foreigners are selling India, not because of India alone, but also because the U.S looks so much more attractive today. Are you concerned with what's happening on the Indian macros and micros, because earnings this quarter, just like we'd seen on Wall Street a few quarters ago, are disappointing?
Mark Matthews: I'm not concerned. I think that it's nice the market is pulled back and in fact, it makes it look quite attractive relative to most other markets. The Nifty is up, I think around 8% so far this year, most other Asian markets are up twice as much. Japan's up, I think around 25% and of course, the U.S is as well. So if I was looking at markets to put new money now, I'd be looking at India, and I'd say, well, it hasn't gone up as much as all those other ones, and as much as there you've seen a downward revision in earnings forecasts.
I think they're a reason to be optimistic that they're going to get revised back up again, because I think you're going to get more government spending. I think you're going to have a good Rabi grain harvest, and I think, you know, the wedding season will be helpful for consumer spending. When I look at the economic growth that is forecast for India over the next two years, it will be 6% next year, and probably over 6% the year after that too, which should translate into double digit earnings growth. So I think India looks absolutely fine. In fact, good.
Mark, you've always been quite the believer in India, right? I mean, you also call it a very superior market to the likes of China. Of course, a few weeks ago, we were fretting about losing foreign inflow to the Chinese markets. That didn't last too long. What I want to get from you is, sure, we are expensive. Do you think the wedding season is going to be good for us? We'll go back in a double digit role. Where is the opportunity? Is it Consumption? Is it Banks? Is it Global facing sectors? Is it Infrastructure? If government spending is going to pick up, where would you place your bets if you had the incremental capital on the sidelines?
Mark Matthews: Consumption and Banks. I think those are the two that would benefit the most.
I am going to quickly interrupt you there when you say, consumption. Are we sticking with rural consumption? Are you sticking with urban consumption? Are you sticking with Luxury spans? Are you sticking with Discretionary or Staples? The reason I ask is because what we saw this quarter is, well, Rural Consumption has picked up in India for reasons that you mentioned, like a good Rabi, Urban Consumption has slowed down. So where do you think the bias on consumption is and of course, then continue with your other sector calls?
Mark Matthews: Rural Consumption and the Private sector Banks would be my two favourite destinations for new money in India right now.
To get your sense on why we have seen this quantum of outflows from foreign investors, and when do you see that turning or do you think we are at the end of that cycle?
Mark Matthews: I think the first thing was the 180 degree turn that the Chinese made on their economic policy a few months ago, which saw a re interest in China after a long time where people weren't looking at it and then the strength in the Dollar over the last one, I guess, since September, Dollar is up about 7%. So it's very difficult for markets in Asia to attract money when the dollar is going up. Those are the two reasons.
So you think it started with a China trigger, and now it's come to a strong Dollar as a reason, none of those looking like they will change anytime soon. So is this the kind of trend you expect to continue seeing as far as foreign flows in India are concerned, or is it more foreign outflows?
Mark Matthews: I can't really guess what people are going to do with their money. But I like India. It's up to other people, whether they want to like it or not. I mean, the Dollar Index at 107, it typically doesn't go much higher than this, and so I don't think the dollar should go much higher than where it is now, although, admittedly, the European economy looks very weak, and two thirds of the Dollar Index is the Euro. But everything has a price. I think the dollar is moving into overvalued territory here. As for China, actually, that story has waned. I like China myself very much, the opposite of India. It's a value investment. India is a growth investment. China is a value investment. But the economic stimulus in China actually has petered out a little bit.
Now, I think they're going to come out with more, but it won't be a big bazooka like it was after the global financial crisis, because they don't want capital to be misallocated as it was back then. So what you get is an incremental stimulus in China. I don't think on its own that's going to drive a lot of money into China. I think that the market can move up slowly and steadily. But I guess what I'm trying to say is I don't expect a lot of money to be going into China from the rest of the world next year. So therefore, sorry, long winded answer from both of those panellists for the outflows that we have seen on the part of foreign investors from India. I don't really see them sustaining themselves.
I think that's the big takeaway. You don't see them sustaining. But just one point on China, you talked about how no big bazooka is expected. I think one big worry globally is what is happening with the Chinese economy, one big, great engine of the global economy. Do you think the tide is turning there, or we are entering a phase of a Chinese economy, I wouldn't say slow down, but definitely not where it used to be?
Mark Matthews: For sure, they're in the doldrums right now. I think there are many, many reasons for that, but the biggest is that property prices are off about 20% from their highs, and realistically, they're probably off about 30% in the sense that if you really want to sell your place, you're going to have to discount by quite a sizable amount to sell it and 80% of Chinese household wealth is in residential real estate.
I think that residential real estate prices in China will bottom over the next few months, and therefore the consumer sentiment should improve after that, and I think that they will come out with some more stimulus over the next few months too. So I don't think the economy in China is that terrible. It's just slow. Put it that way, it's not a it's not a recession.
Okay. So slow down or not, where it used to be, in the doldrums. I think this is a good way to put it. Just one point Mark, on the China, India picture with Trump in the White House. There are businesses here we speak to companies who say that this is going to be very positive for some set of Indian companies. Do you see that?
Mark Matthews: Too hard to say, really, I think in the beginning, Trump's team will be very tough on China and on India, I don't know, probably less tough. But you know that China has largely decoupled from the U.S. Only 3% of China's GDP is exports to the U.S. So although it's a big number in aggregate terms, the percentage of China's economy that comes from exports to the U.S is extremely small. So I guess I would say there'll be a lot of noise around U.S- China trade, but the impact on their economy, I don't see it being big. They've reoriented their trade relationship to the so-called Global South. So it'll be noisy, but I don't think it'll be that detrimental to them.
Mark, sorry, I know we're going a little back and forth, which is coming back to the India Story you talked about, like Rural consumption and private Banks, you also alluded to that you're expecting government spending to pick up in the second half of this financial year. Keeping that as your backdrop, would you also buy into the Infrastructure story in India? So maybe pureplay Infra, maybe sectors like cement, which have had the worst behind them.
Now, at least, that's what we hope. At least that's what management is saying. Would you buy into real estate? Would you buy into roads, railways? Is that a big sort of block that could be interactive at this stage? Also, I'm going to throw in renewables to that mix, because that is a lot of noise. India's very ambitious plans to go from 2 million gigawatts to about 4.8 soon, puts India sort of on the map when you talk about renewables. We've got a few listed companies now. Are you sort of recommending activity or buying across those spaces that I just mentioned, traditional infra, old economy and new economy?
Mark Matthews: Not really. I think there is a danger with the government spending, that if the BJP loses in Maharashtra and Jharkhand, that it's diluted, whereas I just see a lot more probability that the government will be trying to accelerate rural consumption. So no, I would stick with the Rural consumption for now and those private Banks, I think it's fine to just focus on those two.
This is, of course, something that I found on Bloomberg, where Julius Baer has exposure to Infosys ADR, who has done that in the past. I noticed you didn't mention Tech. It's probably insulated from domestic politics, but exposed to Trump politics. The markets, of course, got excited. There was euphoria. Tech companies have been gaining, the Rupee is weaker. Is Tech looking like a good space to you, and if yes, you've got any preferences here, large cap I.T., mid cap I.T. stocks that have a bigger exposure to manufacturing versus BFSI?
Mark Mattews: I mean, each company will have its own good traits and bad traits, and some companies are undervalued and some companies are overvalued. So on a stock specific level, there could be merit to owning a Tech company. But broadly, I would say that when we want to invest in India, we're looking for the domestic growth engine. That's what is appealing about India to us.
So I suppose the technology companies, a certain amount of what they do is oriented toward the domestic economy, but of course, you know, a lot of what they do is oriented toward the rest of the world. So I would just say that our interest in India is more on companies relating to the domestic economy, pure place on that.
How concerned are you about Crude, Mark? Also a quick view on Gold, it's done better than most risk assets in this calendar here. Gold still looks attractive and also a quick thought on Crude?
Mark Matthews: I think both would depend a lot on geopolitics, and so if Trump can achieve some kind of peace in Ukraine and the Middle East, you would think that the Oil price would go down. You would also think that the Gold price should go down. But between the two, I think that, you know, I would always prefer to own Gold over Cash in a portfolio. I think that, you know, it could sell off if we have peace in Ukraine, because I presume there won't be peace in Ukraine without the Russian assets being unfrozen by the U.S government.
But longer term, I think Gold looks good and Oil doesn't, because we are moving into the future driven by renewable energy, and oil will have less of a place in that.
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