00:00 Thanks so much for tuning in to BQ Conversations.
00:02 I am your host, Neeraj Shah.
00:04 Very special guest, Mark Matthews of Bank Julius Bear Johnson, to give us his sense
00:08 of how he looks at India, considering that we are atop Mount 20K.
00:14 Mark, thanks so much for taking the time out.
00:17 Really special having you.
00:18 No, no, it's not special at all, but I'm honored to be here.
00:21 Thank you, Neeraj.
00:22 Thank you.
00:23 For us, it is, Mark.
00:24 And also because it's at a time when Indian markets have gone past one more landmark,
00:30 if you will.
00:32 How do you see Asian markets in general and India within that?
00:36 Because the last time that we spoke, you had mentioned that, yes, India is an attractive
00:40 market, but there are others which are also looking very attractive, Japan, for instance.
00:44 So how is Asia as a bunch looking currently to you?
00:49 I don't recall that conversation word for word, but I'm guessing what I meant by that
00:54 was the size and depth of the Japanese market and the fact that it's a developed market
01:01 with brand names that are recognized around the world was making it the first stop for
01:09 foreign investors in Asia.
01:12 And that, I think, remains the case.
01:14 If you look at the top 100 listed companies in Asia-Pacific by free float, actually almost
01:25 half of them, 45, are in Japan.
01:28 So for very large money like pension funds, sovereign wealth, they are definitely concerned
01:41 about liquidity, and so that provides them a lot of comfort.
01:45 And so that hasn't changed, because Japan is still over twice the size of India with
01:52 a much deeper and more liquid market.
01:55 And as I said, these companies, be it a Nintendo or a Daikin, which are globally recognizable
02:03 -- I'm just picking two, but of course there's dozens more.
02:09 And that gives people a lot of comfort.
02:13 Maybe they haven't visited Japan, but they drive a Toyota or they, you know, use a Nintendo
02:21 at home, that kind of thing, whereas far few people probably have visited India or would
02:30 know the names of companies that operate in India, the big Indian companies, of course,
02:36 that are very familiar to you and to me.
02:40 Most people outside of India wouldn't really know them.
02:44 So anyway, I'm starting from that vantage point.
02:47 And I suppose that nothing's really changed between that last conversation and today in
02:56 terms of that, you know, larger awareness of the world toward Japan than India.
03:03 But what has changed is, I think -- I know it might sound a little bit superfluous as
03:10 far as markets go, but the Chandrayaan-2 mission to the moon and the G20 summit in Delhi were
03:21 genuinely front-page news and very positive news.
03:25 I mean, a lot of times, you know, a country can end up on the front page, unfortunately,
03:32 because it's bad news, like, for example, the delta wave of COVID a few years ago.
03:38 And because India's a very open and transparent country as far as media access goes, that
03:45 was very widely reported, of course, compared to what was going on in China where, you know,
03:50 a few months earlier.
03:53 So those things, I think, have really helped to put India more on the map of just people
03:59 in general around the world.
04:02 And investors, too.
04:04 As is, as you earlier mentioned, the breakout in the market above 2050, a lot of people
04:13 are trend followers, be they retail or institutions.
04:18 And I don't think there's anything really the matter with being a trend-following investor,
04:24 because when a market is trending higher, it's got positive momentum.
04:28 I mean, generally it's going to keep going higher until that exhausts itself.
04:33 So I'd better just round off my answer here.
04:38 But I think that compared to the last time you and I met, there's a lot more interest
04:45 in India.
04:46 I actually just returned myself from Brazil, of all places, and that's normally not a part
04:53 of the world that would be interested in the Indian market.
04:55 But this time they were.
04:57 Wow, that's music to the ears.
04:59 Now, Mark, you've looked at India very, very closely, both on relative terms and I reckon
05:04 even on absolute terms, you have a fair degree of view on India.
05:10 What do your mind or how do you look at it, not relatively, but in absolute terms?
05:17 Because a lot of talk about valuations relative to emerging markets or otherwise being slightly
05:23 expensive, the broader end of the spectrum, the government-led companies all have risen
05:28 quite admirably and quite sharply, if you will.
05:32 How do you look at the Indian markets currently?
05:37 I'd say there's two things that differentiate it positively from its peer group.
05:42 The first is the return on equity, which is in the high teens for India Inc., is quite
05:49 a bit higher than the emerging market average, which is closer to 10%.
05:57 And I don't really know off the top of my head why that is, but it is.
06:01 I guess that other emerging markets just don't have companies as profitable as Indian ones
06:07 are.
06:09 And the second thing is the growth.
06:14 We can find many companies in India where we think that earnings will double within
06:21 the next five years.
06:24 We cannot find many in other emerging markets.
06:29 We can find a handful in each, but when I mean a handful, I literally mean this many.
06:35 Whereas in India, there's several dozen.
06:38 So it's that combination of highly profitable companies and companies that have a strong
06:46 earnings growth that I think make it quite unique in the emerging space.
06:56 Would it be safe to assume, therefore, that you are constructive from where we are right
06:59 now in Indian markets?
07:02 Yes.
07:04 I mean, there is hype in the Indian market, as there is in every market, but because it
07:09 is breaking to new highs, I'd say there's probably more hype than the average.
07:15 So one does have to be selective, but it's a big enough market that you can be selective.
07:22 And so what we do is we do screen for companies that we think, as I said, will produce that
07:29 kind of earnings growth over the next few years.
07:33 And those are the ones we choose to invest in.
07:35 We're fairly sector agnostic, although I suppose that we do have a kind of bias toward
07:41 the financial sector and materials and consumers.
07:45 But any sector where we can identify high growth companies, we will look at them very
07:51 closely.
07:52 Got it.
07:53 Mark, now I'm trying to tie this in with your first answer, wherein you mentioned that a
07:57 number of events, or two in particular, put India on the world map.
08:00 A lot of investors who hitherto would not have looked at India are looking at India.
08:05 People who might have looked at India are now starting to show some interest in India,
08:08 investing into India.
08:10 Maybe a lot of it happens post the general elections get over in 2024, but be that as
08:14 it may.
08:15 If indeed this kind of interest translates into money coming in, which hitherto hasn't
08:22 come into India, do you reckon that it gets absorbed easily, and could that be an even
08:31 bigger positive for the Indian equity markets?
08:36 Well, foreign investors are still relevant and important, but I really do think that
08:44 they are now no longer the most important force, and the most important force is domestic
08:50 investors.
08:51 And I think that baton was passed sometime in the last five years.
08:56 Particularly last year we saw that domestic buying was much larger than foreign selling.
09:03 And the nature of the domestic buying is what encourages me the most, because of the systemic
09:10 investment plans.
09:11 And if you look at other countries that have a similar setup, I can think of two in our
09:18 part of the world, Australia with its superannuation funds, where every month a little bit of everybody's
09:26 salary is taken and invested into the Australian equity market.
09:33 And Malaysia also has a similar program.
09:39 And so that constant domestic institutional buying I think is a force that's here to stay
09:46 and will grow and offers great cushion, great support to the equity market that wasn't around,
09:55 you know, for example, in the global financial crisis, when, of course, foreigners sold India
10:01 and the market collapsed.
10:04 Last year, as we all know, even though the S&P fell a lot, it fell almost 20 percent,
10:11 India in rupee terms was, I think, only down, you know better than I, but something like
10:17 maybe 3 percent.
10:19 Maybe it was flat.
10:20 I can't remember.
10:22 So anyway, that to me is the much more potent force, the domestic investing.
10:30 And because India has a good track record, I mean, if you look at the compound annual
10:36 returns over the last 10, 20, 30 years, it's mid-double digits in rupees.
10:45 Local investors know that it's a good market to invest in.
10:49 You actually can't say that about most other Asian markets.
10:53 They produced roughly half the return, actually lower.
11:00 So Korea and Taiwan probably gave you about 6 or 7 percent per annum.
11:06 Here in Southeast Asia, you were maybe getting 3 to 5 percent per annum.
11:10 So I'll conclude with just saying that it's the domestic investor who I think is the most
11:18 important in India and will remain a very positive force.
11:22 Okay, well, and it's heartening to see, Mark, because it's a change.
11:30 Earlier Indian investors did not own as much of the Indian equity and a bulk of returns
11:35 that have happened in the last 15, 20 years haven't gone to the Indian household.
11:39 That is changing and that's actually really good to know or good to see as well.
11:44 What to your mind, Mark, could be potential tangible risks?
11:53 People cite oil, people cite uncertainty around elections, but that's the two most spoken
12:00 about risks currently.
12:02 Do they feature in your list as well?
12:04 Is there something else that you believe you look out for as a potential risk for Indian
12:09 markets?
12:11 I always have a standard answer to that, which is the risks that end up bringing markets
12:22 down are the ones that nobody's thinking about.
12:24 So you're right, we're all thinking about what are the risks for India?
12:27 Well, if the oil price keeps going up or I don't know, there's some kind of political
12:34 upset or Federal Reserve continues to raise rates, I suspect if there is something out
12:43 there lurking in the shadows, it's not that.
12:48 It's something that we're not really talking about.
12:50 And I don't know what it is.
12:53 I just don't.
12:54 But maybe some corporate governance scandal.
12:58 Who knows?
12:59 But I don't really see, yeah, I guess I feel confident enough to say this, I don't really
13:05 see any big risks on the horizon that are tangible enough that would dissuade me from
13:13 putting fresh money into the market.
13:16 Which is great to know.
13:17 One last question, Mark.
13:20 There has been this consistent debate over the last couple of months around what's happening
13:26 in the US in terms of the economic indicators versus the resultant impact on, let's say,
13:32 yields or not just treasuries, but even the currency markets.
13:37 And a lot of talk about a belief that the dollar index will strengthen quite materially
13:43 and the resultant impact it could have on other Asian currencies, including the rupee.
13:48 Could that be something that could upset the apple cart?
13:52 Or do you reckon it will be a smooth transition, something that we've seen in the past almost
13:57 every year?
14:00 It would be.
14:01 The dollar rising is, as we know, historically a headwind for the Indian market.
14:09 And the dollar has been rising over the last couple of months, or maybe I should say month.
14:15 Yeah, maybe.
14:17 I mean, certainly the Americans still have a much higher interest rate than most other
14:24 developed countries--Europe, Japan.
14:29 I think they're even higher than Australia and Canada, their treasury yield.
14:37 But we're of the view that the rate hike cycle generally in the world is coming to an end.
14:47 And led by the United States.
14:50 And so we don't really see treasury yields going higher.
14:55 We think that they're probably going to go down from here.
14:59 So with that in mind, I like the dollar, actually.
15:05 I would prefer to be in dollar than euro or most other currencies.
15:11 But I don't really expect it to suddenly jump up.
15:17 What is the dollar index now?
15:19 I have to ask you to forgive me.
15:22 I don't know off the top of my head.
15:23 104, 105.
15:24 It's slightly above--105, yes.
15:25 Yeah, 104, 105.
15:26 So, you know, I don't think it's going to 120 or something like that.
15:30 And I mean, I think it's fine at about 105.
15:34 I think that if it just stays around there, then India can still do well.
15:40 Great.
15:41 Mark Matthews, thank you so much for taking the time out and speaking to us.
15:45 And have a great week ahead.
15:47 Thank you, Neeraj.
15:48 You too.
15:49 Thank you very much for inviting me on your show.
15:50 The pleasure was ours.
15:51 Viewers, thanks for tuning in.
15:51 [MUSIC PLAYING]
15:59 [MUSIC PLAYING]
16:09 [MUSIC PLAYING]
16:29 [MUSIC PLAYING]
