Markets are not going to fall much from here: Ashmore Group's Jan Dehn

Jan Dehn, head of research at Ashmore Investment Management
A sliding rupee, rising crude oil prices and trade war fears have dented market sentiment over the past few weeks. London-based Jan Dehn, head of research at Ashmore Group, tells Puneet Wadhwa that the company has cut its exposure in India over the past few months for tactical reasons. Edited excerpts:

Is India fast losing its appeal among foreign investors?

No, foreign sentiment towards all of emerging markets (EM) has been dented this year due to protectionism fears and temporary impact of the Trump tax cut on US growth. This is not India-specific at all. Indeed, the main change in India is a stronger outlook for consumers and consumption–led sectors, which is a positive development.

What is your current allocation and do you plan to trim exposure next year?

We have light exposure in India due to the Indian government's odd resistance to joining global benchmark indices for fixed income, which by the way, would have led to net inflows to India and therefore less pressure on the rupee. We also have light exposure for tactical reasons, mainly to do with dollar strength and protectionism. However, these are merely tactical considerations. I have no doubt whatsoever that our exposure will increase meaningfully in the next six months.

How much more could the Indian markets fall from the current levels?

Markets are not going to fall much from here, if at all. Trump’s perverse fondness for taxing American consumers will be challenged strongly by Republicans after the mid-term election in November, when the focus shifts to avoiding a recession before the next US presidential election in 2020. 

How will corporate earnings play out?  Which sectors and stocks are you overweight and underweight on?

The corporate earnings outlook in India looks solid. The consumer/ consumption sector is in play and the government provides a gentle tailwind with its fiscal policy. The current consensus, however, is too conservative. Global headwinds will fade and the consumer/consumption story will pick up further. This should lift earnings relative to the current consensus.

What is your view on mid-and small-cap stocks?

They are a buy for the medium-term. Large-caps, on the other hand, have started to really benefit from the reforms early in Narendra Modi's term as well as fiscal stimulus, but with the consumer/consumption story coming back, there will be a recovery for small-and mid-sized stocks around the corner, too.

How do you view the government’s decision to merge three PSU banks?

The government is finally addressing the problem in the banking system. Sound banks are a prerequisite for consumer-led growth and credit to business. Good news, clearly. Public sector banks (PSBs) should be assessed on an individual basis, as should all stocks. Even, PSU banks are now attractive.

What is your interpretation of the recent macro-economic data from India? Do you expect the rate hikes by the Reserve Bank of India (RBI) to be steeper given the rupee’s fall?

The fall in the rupee this year is driven 95 per cent by the broad rise in the dollar, and is likely approaching its final stages. There is no strong evidence of pass-through to inflation, which remains well-behaved in large part due to the credibility of the RBI. It would be wrong to hike materially solely due to changes in the exchange rate. The RBI's focus should be on prices, not the forex rates.

Do you see the government revise the fiscal deficit target? How are the markets likely to react to any slippages?

While adjustments can never be ruled out, I do not see this government abandoning fiscal discipline going ahead. 

Global markets are getting confused with the blow hot, blow cold on trade wars. What’s your interpretation?

I disagree. There is no confusion. Trade wars are bad. Full stop. India and many other EMs have long and painful experiences of protectionism and import-substitution industrialisation policies. EM countries should stand up as a group to educate the American president about how not to run a trade policy. It just may save the world from an earlier-than-expected recession in the US.

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