Outlook for Indian equities is positive, policy credibility high: Jan Dehn

Jan Dehn
The markets have been consolidating after a sharp post-election outcome rally that took the frontline benchmarks to a record high. London–based JAN DEHN, head of research at Ashmore Investment Management, tells Puneet Wadhwa he expects some profit-booking to set in and that investors should buy into such dips. Edited excerpts:

How are you viewing India as an investment destination after the general election outcome?

The outlook for Indian equities is positive. The economy is broadly balanced, policy credibility is high and a new government is in power with a strong mandate. It really boils down to how well Prime Minister Narendra Modi will administer this bounty of tailwinds. If, as he did in his first time, focuses on reforms early in the term, by which I mean that he spends his political capital removing the obstacles of the supply side of the economy so that demand can rise without creating major imbalances, then Indian economy, as well as equities, could do extremely well over the next several years.

What policy measures do you expect the government to undertake?

I would like to see PM Modi furthers India’s integration into the global economy. A country of India’s size and sophistication should be a major player on the global stage, but it is not. India remains a surprisingly insulated economy punching far below its weight. The key is to further open up the economy, but this can only be done if the problems of public sector banks are finally cleared up. I hope the government will fix the banks and open up the economy. Education, infrastructure and regulation are the other areas where India can make major progress.

What's your interpretation of the recent developments in the US (trade war) and the United Kingdom (Theresa May’s exit)?

Western economies never tackled head-on the problems, which led to the crisis in 2008/2009. The response —reliance on very cheap money on the back of quantitative easing (QE) policies -- did nothing to reduce debt, increase productivity and address income inequality. As a result, political discontent has been rising. Trump, Brexit, Yellow Vests in France, and populism in Italy are all products of a massive political failure to fix deeper problems in society. Sadly, the problems will only get worse. Indians and other investors in emerging markets should pay close attention because when Western economies become populist and protectionist, it will have global ramifications.

Do you plan to hike exposure to Indian equities?

We have been adding exposure in select areas going into the election but are now taking some profits on these trades on the back of a strong rally after the election. We expect that some profit-taking will be forthcoming soon because election-related euphoria never lasts. When such a dip happens, that will be a good time to enter the market again. I know that it is unusual in finance, but the key to making money is to buy when it is cheap and to sell when it is expensive.

How do you see corporate earnings play out amid all this? Your estimates for FY20?

The economy has been softening at the margin. This will weigh on earnings and limit the room for upside surprises until we see a fresh injection of impetus from the newly re-elected government’s programme. If, as I hope, this includes reforms then the economy could even go through the usual dip associated with reforms anywhere. Given the high valuations in the Indian market, this speaks for tactical trimming but only in order to re-enter at a time of more attractive valuations.

Do you see the government revising the fiscal deficit target?

The government engaged in election-related fiscal slippage ahead of the election. The splurge was not excessive. However, it happened and it is now important that fiscal accounts are brought back into line. If the big lesson from Modi’s first term was early reforms pay off, the big lesson from Congress’ time in office was that big fiscal does not pay off. I hope that Modi realises that the single-largest threat to the Indian economy is bad fiscal policy. If fiscal gets out of line, then the monetary policy soon becomes ineffective. And that is the road to ruin.

Your outlook for interest rates in India?

The Reserve Bank of India (RBI) RBI should cut at least twice. The economy is going to have a bit of an election-related hangover given that the government went a bit down the road of fiscal populism before the vote. However, the cuts will only be viable if the government takes the foot off the fiscal pedal and shifts the focus on supply-side reforms. Reforms lower the costs in the economy and increase the productivity of labour and capital. This, in turn, enables demand to rise without becoming inflationary. This is quite different from fiscal stimulus and rate cuts, both of which stimulate the demand side of the economy. India needs supply-side relief, not more demand stimulus.

A number of experts had written-off the Indian ‘consumption story’. Do you think it could be a contrarian play in case the government’s fiscal stimulus to revive the economy comes through over the next six months?

One must distinguish clearly between government and private sector consumption. More fiscal spending – that is government consumption – means the less room for private sector consumption. This is because higher fiscal spending raises the cost of borrowing and thus makes private sector borrowing more expensive, which depresses both investment and consumption.  

The key to Indian consumption is not government spending. The key is to get the banking system fixed, the ensure credit growth to the private sector is abundant, to generate strong demand for labour, which requires investment, which in turn depends on confidence in the sustainability of the economic outlook. As far as health of the private sector is concerned, fiscal stimulus is the equivalent of peeing in your pants to keep warm. You may be a warm fuzzy feeling at first, but before long you wish you had not done it at all.

What’s your view on the banking (private and public sector) and non-bank finance companies (NBFCs)?

This depends entirely on the tack taken by the newly elected government. If the government gets serious about fixing the remaining problems in the banking sector then there will be bigger upside for the retail facing part of the business. If not, the corporate facing side will be favoured, because credit will then continue to circulate in a circle of established companies without access for new entrants.

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