Indian equities are attractive, mainly on fundamentals: Ashmore's Jan Dehn

A large part of the market buoyancy over the past few months in India has been on account of mid- and small-caps, says Dean

As the economy and the markets change gears after the second Covid wave, London-based JAN DEHN, head of research at Ashmore Group, tells Puneet Wadhwa in an interview that foreign investors are mainly focusing on the US due to advanced vaccinations, but this will change once vaccinations in India and EMs pick up and the economic recovery gets stronger. Edited excerpts:

How attractive do Indian equities look in the context of global markets?

Indian equities are very attractive, mainly on fundamental grounds. India has managed to curb the spread of the Delta variant of coronavirus with far greater success than many expected, paving the way for greater economic activity, which should support earnings. While valuations are tight, this is the case everywhere but positioning in India by foreigners is relatively modest and the fundamental outlook is solid. A large part of the market buoyancy over the past few months in India has been on account of mid- and small-caps. There is further absolute upside potential in these two segments as the economic recovery broadens. The euphoria among retail investors is worrying. But that's the case across the world. India has fundamentals and relatively low exposure by foreigners as tailwinds.

What is the road ahead for foreign flows into Indian equities?

My expectation is that the flow into emerging markets (EM) will continue, albeit at a slower pace and more erratically than in normal recoveries. Global capital needs to move to EM countries due to enormous distortions caused by quantitative easing (QE) policies, which acted like a giant subsidy that sucked capital into mainly US stocks and European fixed income. Those two markets are now very expensive and there is more money to be made in EMs. However, many investors think EMs are risky. However, if investors want to make money, they will have no choice.

Can firm commodity prices, especially oil, derail the Indian equity story over the next few months?

I do not see this as a major risk. Much of the move in commodity prices is due to temporary reasons. With the lifting of lockdowns, demand has recovered faster than supply, pushing up prices, but higher prices will soon spur a supply response, which will help balance the markets and stabilise prices. This is not a long-term problem and the Reserve Bank of India (RBI) will be right in looking through the transitory noise.

Your overweight and underweight sectors?

We are quite positive about earnings growth in FY22 and it should be well ahead of 20 per cent, led by financials (lower credit costs), materials and industrials. We are overweight on financials and industrials, as well as pharmaceuticals, and marginally overweight IT services.

Can 2021 be the year of banks as the economic recovery gathers steam?

Banks benefit disproportionately under two conditions — when demand for loans rises due to a pick-up in economic activity and when the yield curve steepens, so they can lend at higher prices than what they pay for deposits. With the economic bounce set to continue and RBI erring on the side of dovishness, I think both conditions are in place right now. So yes, banks could do well.

Have the markets and Covid-impacted sectors been disappointed with the government’s policies over the past year?

The government was in a tight fiscal spot to begin with, and therefore, somewhat constrained. Credit agencies globally would have been very fearful if the Government of India had spent more. Fiscal deficits — both for the central government and states in double digits — mean that targeted relief, and food and cash support provided were sensible policies. Governments at various levels are now trying to roll out vaccinations aggressively, which is necessary to put Covid into the past.

All in all, the only policy criticism I have is that the government did not anticipate a second wave and could have rolled out vaccinations earlier and could have been better prepared for the second wave. Oxygen shortages, for example, was an easy fix had India been prepared for the second wave. In general, on the policy front, the government's aim is to be less involved in businesses as stated in the Budget. This is the right reform to pursue. I hope we see a return to this key focus once the Covid focus is over.

Are foreign investors taking the economic recovery data in India with a pinch of salt?

Yes, emerging markets are always marginal in the minds of investors, including India. Foreign investors are, so far, mainly focusing on the United States due to more advanced vaccinations, but this will change as vaccinations in India and EM pick up and the economic recovery gets stronger. This is not an unusual pattern in markets, which are so imbalanced.