I'm very bullish on EM equities for next few years, says Jan Dehn

JAN DEHN, Head of research, Ashmore Group
Despite a series of policy measures undertaken by the Indian authorities to stem the economic fallout of the Covid-19 pandemic, London-based JAN DEHN, head of research at Ashmore Group, which has nearly $100 billion worth of assets under management, tells Puneet Wadhwa that India will not be able to attract overseas funds purely based on its fundamentals, as the government has lost much of its zeal for reform and is now leaning more on fiscal stimulus. Edited excerpts:

What is your outlook for the markets?

It is important to look beyond the short-term market gyrations and instead look where assets are cheap relative to fundamentals and not just because of momentum. The markets most impacted by momentum are also the most expensive — and those markets are most heavily dependent on central bank support. I would stay clear of those as they do not have inherent growth potential.

How do you see equity as an asset class perform vis-à-vis other assets over the next year?

The dollar is going to fall, which will mark a shift in the global capital of a scale we have not seen for a decade. Too much money is parked in US assets and the dollar. Much of the rest of the world has been ignored from an investment perspective. This is about to change. In emerging markets (EMs), inflows are key to growth, as in EM countries finances are constrained. Inflows reignite domestic demand and hence growth, but flows only come if the dollar falls. I am very bullish on EM equities for the next few years, but very bearish on US equities. EMs will significantly outperform developed market (DM) assets. Both bonds and stocks, as well as currencies. We have used the dip in global risk appetite to load up on EM assets.

What are your views on India as an investment destination within EMs?

The Indian markets are structurally expensive, but entering a late stage in the political business cycle. Quite worryingly, the Narendra Modi administration is increasingly leaning on fiscal stimulus, rather than reform. This is something we also saw towards the tail end of the United Progressive Alliance (UPA) administration. It is not a good recipe and leads to lower investment willingness, less growth, worse fiscal balances. I prefer stock exposure in the Far East, which were the first into the coronavirus crisis and will also come out first. In terms of bonds, I like Latin America, where yields are high and inflation is falling very sharply.

Will India be able to attract incremental FPI flows within EMs over the next one year?

Increasingly, India will not be able to attract funding purely based on its fundamentals, because the government has lost much of its zeal for reform and is now leaning more on fiscal stimulus. This is not good. Hence, the easiest way for India to continue to attract foreign capital is to enter benchmark indices, which, since many institutional investors will buy anything as long as it is in an index, is a safe way of attracting long-term stable capital. However, downgrades can result in India missing out on some of the best quality capital. The worsening credit picture in India can only be overcome with the resumption of aggressive reforms, which I do not think is realistic right now.

How are foreign investors likely to view the developing geopolitical situation between India and China?

The markets are currently sensitive to the fundamental outlook in India and geopolitical tensions between China and the US. The outbreak of hostilities between India and China touches both these sensitivities. As such, it is something the market cares about. However, there is little belief — and therefore it is not priced in — that these tensions will escalate into an outright war. So, as long as things remain at the level of low-intensity skirmishes between India and China, which have been going on since the 1950s, this conflict is not going to have anything other than a transitory impact on the markets.

Your overweight and underweight sectors in the Indian context?

Indian demand will rise as lockdowns are lifted. This is slowly happening, but there is no guarantee that infections will not surge again. We are overweight on assets that benefit from greater government spending plus defensives, and are underweight on cyclicals.

Have the policymakers in India – the government and the Reserve Bank of India (RBI) – been able to address the economic fallout of the pandemic effectively?

The quality of government policy has steadily worsened in recent years. The RBI remains the strongest institution, but we know that RBI easily falls hostage to the fiscal authorities when government spending starts to rise. India needs to refocus on competitiveness, but there is little chance of this happening on this side of an election.

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