Any correction will be a very good opportunity to buy: Jan Dehn

Interview with Jan Dehn, Head of Research, Ashmore Investment Management

Given the nearly 24 per cent rally in frontline Indian benchmarks this calendar year, JAN DEHN, head of research at London-based Ashmore Investment Management, tells Puneet Wadhwa that within the emerging markets (EMs), Indian stocks look pricey. We now need to see strong earnings for stocks to meaningfully move ahead of other EMs, he says. Edited excerpts:

Moody's has upgraded India's credit rating. How do you read this move?

At first sight, the upgrade might look like any other late ratings action, i.e coming long after a country has completed reforms. Misplaced in this case. It is not only that by doing this, Moody’s has moved a step ahead of the other agencies; but the timing is bold.

The Indian market has recently reacted quite strongly to negative data surprises, including a wider than expected current account deficit and higher than anticipated inflation. Moody’s is right to look through these temporary setbacks. The data misses are from a low base and are partly caused by higher oil prices and global sentiment, partly profit-taking. None of these factors pose a serious threat.

Moody’s is right to express a growing conviction that India stands to gain significantly from the reforms undertaken. Short-term jitters are not justified. Moody’s is right to look through the fog to the clearer skies beyond. 

How will this impact the markets?

The move should be supportive. I think the basis is being laid for strong performance in 2018, on the back of the pullback we have seen in the second half of 2017.

Could oil prices play spoilsport?

I am sanguine about oil. The recent spike in prices has been triggered by uncertainty in Saudi Arabia and doubts about Venezuela’s ability to continue servicing debt. Both situations are exaggerated in terms of the risk to oil supply. So, prices will moderate. Besides, US shale producers will come in between $60 and $65 a barrel, which should contain the upside.

Could 2018 be the year of mid-caps and small-caps? 

Yes, I agree with that. Much of large-cap is expensive. We favour industrial lenders, construction, manufacturing, transportation and real estate. We like the bombed-out pharma names and mid-cap IT (information technology). We stay away from consumers, large-cap IT and expensive financials.

What about flows into India?

These are likely to pick up in 2018, after profit-taking in the last quarter of calendar year 2017. EMs are the best performing stock markets in the world over the past two years and most global investors are underweight on account of the negative sentiment surrounding EM assets during the quantitative easing period in 2010-2015. There is, typically, a lag of two years between a major turning point in the market and when institutional flows pick up in earnest. Within EMs, India looks pricey; so, we need to see strong earnings for stocks to meaningfully move ahead of other EMs.

How big a threat is India’s booming primary market to the liquidity in its secondary market?

Not a big threat. The frothy primary market is a reflection of an expensive market and might signal a correction in prices, which will be healthy.

How are you viewing the developments on implementing the goods and services tax (GST) and India’s recent macro economic data?

I continue to believe investors should look through GST implementation issues. Reforms always take their toll but these setbacks are temporary and the government has shown in the past few days that it is ready to be pragmatic. There is no doubt that GST is a better and more efficient system, which will pay off many times over in the coming years. 

The main concern in India right now is probably sentiment – rising oil prices, a pick-up in inflation, GST implementation issues, banks recapitalisation, etc, can easily be cooked into a rich sauce of risk aversion. However, if the markets correct, this would be a very good opportunity to buy. The broader picture remains very supportive. India’s economic fundamentals have not looked this solid for more than a decade.

What are the key takeaways from September quarter earnings?

The picture was in line with expectation, offering confidence that earnings are rising steadily, not at a frothy pace. Indian stocks remain expensive. However, I see no major triggers for a big correction, given the solid economic backdrop. The big story was that there was a great deal of diversification within sectors. So, stock picking, rather than broad sector plays, is becoming more important.

What should be the investing strategy?

Investors should shift to capex-heavy plays on domestic demand. Bank recapitalisation plays will help ease the credit picture. Better banks means easier access to investment loans and GST implementation should enable many companies to realise economies of scale in production, for which they need additional credit.

How do you see the policy action by the various central banks play out over the next one year?

Both, the US Federal Reserve (US Fed) and the European Central Bank (ECB) want to gently scale down the pace of asset purchases with a view to slowly deflating the bubbles in their stock and bond markets, respectively. The main difference between them is that the US Fed will hike opportunistically along the way, while Europe will keep rates flat throughout 2018. The biggest uncertainty surrounds the United Kingdom (UK), which faces a very tough situation of its own making due to Brexit.

Which other regions besides India are on your investment radar?
 
We like fixed income in Latin America due to the gentle recovery in growth and still very benign inflation due to spare capacity in most economies. The Far East, on the other hand, is close to full employment and some countries may even hike rates. This should be very supportive for currencies and especially stocks, bond less so. Eastern Europe is mainly a currency play as the euro outperforms the USD over the next 12 months.