 "Investors should not worry about the monsoon: Jan Dehn")
It was a double whammy for the markets last week. While on one hand the Reserve Bank of India (RBI) decided to wait for data on monsoon and inflation before cutting rates further, India Meteorological Department (IMD) lowered its monsoon forecast. As a result, the Sensex slipped over 1,000 points in two sessions. UK-based Jan Dehn, head of research, Ashmore Investment Management, which manages about $61 billion in assets across emerging markets, tells Puneet Wadhwa that foreign investors still believe in the India story and the markets offer a considerable upside over 12 months. Edited excerpts:
What is your call on the emerging markets (EMs) over the next six to 12 months, especially India?
India looks good. The central bank has been supportive but this means the onus is now on the financial authorities and legislators to carry the torch. Over to you, Mr Modi and Mr Jaitley!
The Indian stock markets got a bit too hot. Basically, they got ahead of events in the real economy. A stock index can rally far quicker than a government can deliver reform or an economic cycle pick-up. A correction is healthy, but India offers considerable upside over 12 months and beyond. I would buy into weakness and add to cyclical stocks.
Are the markets over-reacting to fear of a deficient monsoon?
Foreign investors believe in the India story and will remain invested but short term sentiment is affected by events outside of India and these will impact the overall positioning of foreigners. Investors should not worry about the monsoon. This is a temporary problem which might make the Reserve Bank of India a bit less dovish but the long-term story for India remains solid.
Which other market in the region could attract more foreign flows than India?
China, obviously. India is in serious danger of missing a trick, because its policy makers are too timid. The central banks in all the world's main reserve currencies - pound, euro, yen and dollar - are printing money and trying to convert their debt problems to inflation problems. They will succeed. When they do, the world will be in sore need for new global reserve currencies. China has spotted this opportunity and is opening its markets to foreign investors. China's currency will be in strong demand by central banks and, therefore, will become a safe haven currency.
India could do the same but sadly, India's policy makers lack the vision to grasp the opportunity before them, it seems. Instead, they spend a lot of time fretting about the dangers posed by tightening monetary policy in the US. This is defeatist, vision-less talk. China will be a huge winner in the future and India, unless it becomes bolder, will end up missing a massive opportunity.
Don't you think the Chinese markets are getting to a bubble-like situation, despite the measures to cool off the rally?
China equities have very strong technical support. It is a $10-trillion market and foreign investors have barely any exposure. The market is currently dominated by speculative investors who are trying to front-run real money investors. This means the market could become volatile but, ultimately, this market will reward those that enter.
Has the slow pace of reforms under the new Indian government been a disappointment for foreign institutional investors?
I think the market is being too critical. The government has done a lot and it has constraints in the Upper House (of Parliament). The government is, however, trying to work around these constraints and I think it will succeed. A bit of patience is required.
How do you see India's key macro economic variables playing out over the next few months?
I expect growth to hold up at decent levels and for the business cycle to pick up over the next 12 months, aided by a pick-up in government investment. I expect the financial balances to improve on stronger growth. I think the current account deficit will widen slowly but be financed easily with inflows. The rupee will range-trade. Inflation will continue its recent benign trends but base effects will begin to push inflation higher as we enter 2016. Hence, there is little room for complacency from RBI.
Do you think RBI is being over-cautious on inflation control and compromising on growth for inflation?
No, I think RBI is acting cautiously and sensibly. RBI cannot compensate for reforms and fiscal adjustment. It took a chance by easing early, but now the responsibility lies with the fiscal authorities to deliver more reform. Once they do, RBI can ease further but only then.
How do you see corporate earnings panning out over the next few quarters in the Indian context?
They can only improve. I like cyclicals, including autos, financials, banks and discretionary spending items, such as retail and cinemas.
What is your call on the emerging markets (EMs) over the next six to 12 months, especially India?
India looks good. The central bank has been supportive but this means the onus is now on the financial authorities and legislators to carry the torch. Over to you, Mr Modi and Mr Jaitley!
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Where do you see the Sensex/Nifty over the next 12 months?
The Indian stock markets got a bit too hot. Basically, they got ahead of events in the real economy. A stock index can rally far quicker than a government can deliver reform or an economic cycle pick-up. A correction is healthy, but India offers considerable upside over 12 months and beyond. I would buy into weakness and add to cyclical stocks.
Are the markets over-reacting to fear of a deficient monsoon?
Foreign investors believe in the India story and will remain invested but short term sentiment is affected by events outside of India and these will impact the overall positioning of foreigners. Investors should not worry about the monsoon. This is a temporary problem which might make the Reserve Bank of India a bit less dovish but the long-term story for India remains solid.
Which other market in the region could attract more foreign flows than India?
China, obviously. India is in serious danger of missing a trick, because its policy makers are too timid. The central banks in all the world's main reserve currencies - pound, euro, yen and dollar - are printing money and trying to convert their debt problems to inflation problems. They will succeed. When they do, the world will be in sore need for new global reserve currencies. China has spotted this opportunity and is opening its markets to foreign investors. China's currency will be in strong demand by central banks and, therefore, will become a safe haven currency.
India could do the same but sadly, India's policy makers lack the vision to grasp the opportunity before them, it seems. Instead, they spend a lot of time fretting about the dangers posed by tightening monetary policy in the US. This is defeatist, vision-less talk. China will be a huge winner in the future and India, unless it becomes bolder, will end up missing a massive opportunity.
Don't you think the Chinese markets are getting to a bubble-like situation, despite the measures to cool off the rally?
China equities have very strong technical support. It is a $10-trillion market and foreign investors have barely any exposure. The market is currently dominated by speculative investors who are trying to front-run real money investors. This means the market could become volatile but, ultimately, this market will reward those that enter.
Has the slow pace of reforms under the new Indian government been a disappointment for foreign institutional investors?
I think the market is being too critical. The government has done a lot and it has constraints in the Upper House (of Parliament). The government is, however, trying to work around these constraints and I think it will succeed. A bit of patience is required.
How do you see India's key macro economic variables playing out over the next few months?
I expect growth to hold up at decent levels and for the business cycle to pick up over the next 12 months, aided by a pick-up in government investment. I expect the financial balances to improve on stronger growth. I think the current account deficit will widen slowly but be financed easily with inflows. The rupee will range-trade. Inflation will continue its recent benign trends but base effects will begin to push inflation higher as we enter 2016. Hence, there is little room for complacency from RBI.
Do you think RBI is being over-cautious on inflation control and compromising on growth for inflation?
No, I think RBI is acting cautiously and sensibly. RBI cannot compensate for reforms and fiscal adjustment. It took a chance by easing early, but now the responsibility lies with the fiscal authorities to deliver more reform. Once they do, RBI can ease further but only then.
How do you see corporate earnings panning out over the next few quarters in the Indian context?
They can only improve. I like cyclicals, including autos, financials, banks and discretionary spending items, such as retail and cinemas.