India’s bond market seeing more foreign inflows: Mitul Kotecha, TD Securities

India escapes some of the worst pressures from slowing Chinese economy and a worsening trade environment, says Mitul Kotecha, Senior EM Strategist, TD Securities. Excerpts from interview with ETNOW.

China GDP growth has slowed to 6.2% in the second quarter from a year earlier, the weakest in 27 years. But it is a number which is broadly in line with what the street was anticipating?
Correct, it was not a big surprise. What was more interesting was that some of the more high frequency numbers that were released at the same time such as industrial production, fixed assets investments and retail sales all came in higher than expected and that follows some of last week’s numbers including aggregate loan growth and spending numbers that showed effectively that at least we are seeing a bit of stability in some of the high frequency data even as the more backward looking Q2 numbers had softened.

China slowdown is something we have been talking about. It has been a theme that we have been discussing for the last couple of quarters, if not almost two years in light of the trade war as well. How big a threat is China slowdown to the global economy and then say an emerging market like India?
You are right. There is certainly no sign of any deal on trade front coming soon. President Trump may benefit from this in the prolonged trade discussions leading into elections. That will probably suit him better in an imminent trade deal. But what that does mean for the global economy is further pressure, further weakness in trade globally and that means pressure generally for central banks to ease policy and for the dollar perhaps to come under a bit more pressure in this environment, where the Fed may also need to be more aggressive in easing.

How does it affect India? Well India is less prone to trade weakness. But nonetheless it will be impacted by weaker exports and import numbers. We do not see India being impacted as much as other countries in Asia which are more trade orientated. We are already seeing that in some of the data in the likes of Singapore, Korea, Taiwan, etc, which are certainly being hit by weaker global trade.

China weakness clearly impacts the region but again India and China trade is too limited compared to the China trade with other countries. In that sense, India escapes some of the worst of the pressures from slowing Chinese economy and a worsening trade environment.

Across emerging markets, global yields have come down. Do you think the point that you were making where central bankers will have to ease, is what the markets are trying to price in globally?
Already what is happening is we are seeing bond yields decline globally. G-10 bond yields are increasingly becoming negative. A huge proportion of the G-10 bonds are in negative yielding territory. There is certainly a rush for emerging market bonds as well yields. India’s bond markets are seeing more foreign inflows, same as Indonesia where relatively high yield are attracting such flows.

In this environment, where you are seeing pressure on growth, trade and inflation, it is still pretty conducive for bond markets to rally. The only dichotomy or an issue here is that equity markets are also pretty strong globally and you cannot have every asset rallying at the same time. So, there is going to be some pain somewhere along the line as we go into the next few months.

But again, with the Fed likely to cut at the end of this month and probably cutting, in our view at least twice more this year, it is still pretty positive for bonds on the short end of the curve and probably steepening in yield curves that we are seeing in the US now as well.

What does all of this mean for equities? Sooner or later, would equities also react to lower flows or markets will wait for growth?
This is the problem at the moment. Equity markets seem to be running strongly on expectations of easing. Now at some point, when easing is coming for a reason and not because growth is weakening and earnings are weakening, you may see some potential pain on equity markets if it becomes apparent that earnings pressures are intensifying. The next round of quarterly earnings in the US will be watched very closely.