Cutting India exposure due to poll-related noise: Ashmore Group's Jan Dehn

The markets are waking up to the fact that some of the big trades, which made a lot of money during the period with hyper-easy monetary policies, may be over, he adds

The Interim Budget and the outcome of the general election are the two big events that the markets will keep a tab on over the next six months. London–based JAN DEHN, global head of research, Ashmore Group, tells Puneet Wadhwa that the small- and mid-caps should be a good place to invest over the next few years, but only if the government does not mess up on the macro. Edited excerpts:

How do you see global equity markets playing out in 2019?

I strongly expect emerging market (EM) equities to outperform developed economies. For the past decade, developed market earnings have improved on a rising economy, while costs were low due to unemployment and quantitative easing (QE) policies. The big piece of news from 2018, as far as equities are concerned, was that costs have now started to eat into earnings in the US. Costs are rising due to the dollar, the US Federal Reserve, wages and, of course, tariffs. These costs will not come down anytime soon. By contrast, EM economies have room to expand without cost pressures, while earnings have a lot of upside potential. EM economies are expected to account for nearly 80 per cent of global growth by 2023. 

What is the impact of recent developments in the US and the UK?

The markets are waking up to the fact that some of the big trades, which made a lot of money during the period with hyper-easy monetary policies, may now be over. The big US stock market rally and the strong dollar are over. This favours EMs, which should continue to see inflows. Inflows will help EM growth, but in developed markets, the tendency towards stagnation is already introducing problems, such as Brexit and many of US President Donald Trump’s policies. The markets are not yet fully pricing in the downside risks of these trends, so there will be losses. The risks are in developed economies, not in EM.

Do you think 2019 could be a choppy year for EMs as Indonesia, India, the Philippines, Greece, Argentina, Poland and South Africa face an election-related uncertainty?

Elections usually give rise to a bit of volatility in the month prior to the election, which is then usually reversed immediately afterwards. It is, therefore, generally a good idea to actively trade elections. As for more serious lasting risks, these tend to materialise sometime after elections, of course, only if it resulted in the election of a bad president or government. This is usually not the case. I am not really worried about any of the EM elections, but the one in Argentina can prove important if Mauricio Macri (the current president) fails to win. My base case is that he wins, though. 

How does India look as an investment destination within the EMs? 

India has abandoned some of the key pillars of macroeconomic responsibility of late, which has resulted in the loss of Urjit Patel at the Reserve Bank of India (RBI). There has also been fiscal slippage. However, the economy is going strong and the inflation rate is low, so, for now, there is no major damage. Thus as long as these setbacks are reversed after the election, we may not see any lasting damage. If they are not reversed, India’s path in the next few years will mirror that of the last few years of the Congress administration. The market will hate that and as the economic problems pile up the government will realise it is making a serious mistake, which can make it unelectable for many years, as was the case with the Congress. 

What’s Ashmore Group’s stance on India? 

We are trimming India exposure in anticipation of election-related noise. That said, we want to buy back into the market at cheaper levels if such noise materialises, and provided that the government does not sacrifice all the macroeconomic gains of the past few years on the altar of short-term political objectives. In other words, our re-entry is conditional. We have choices. 

Which are the key investments options?

There is a decent cyclical upswing underway, which could make small- and mid-caps a good place to be over the next few years, but only if the government does not mess up on the macro around the election and beyond. As we gain more insight about this leading up to and immediately after the election, we will shape the allocation with an emphasis on cyclicals, provided that there are no negative surprises. 

How do you see the corporate earnings play out amid all this?

I think earnings and other such factors will play second fiddle to macroeconomic events leading up to the election. Once this risk is out of the way, then we will see more rational trading.