 "Long-term outlook for India remains extremely strong: Jan Dehn")
Market participants have been reading the fine print of the US Federal Reserve statements on tapering and fine tuning their investment strategies accordingly. London-based Jan Dehn, global head of research at Ashmore tells Puneet Wadhwa in an interview that though the long-term outlook for India remains strong, investors are looking beyond the current political lame duck period to a possibly more decisive government after the next elections. Edited excerpts:
There have been mixed signals from the US Federal Reserve (US Fed) regarding the taper of its bond buying programme. What do you make of the recent statements and the economic data coming from the US?
The US Fed wants to scale back QE (quantitative easing) because continuous money printing is creating a bubble in stock markets. The Fed's problem is how to scale back its purchases of government bonds without causing the government bond curve to blow up. Rising bond yields hurt the US economy because of its enormous debt load (405% of GDP excluding some additional 300% of GDP in unfunded long-term social expenses).
My view is that the Fed will try to taper again, albeit with a stronger form of guidance about future rates. But there is no guarantee that the bond market will believe the Fed's guidance. As for the economic data, the headline GDP (gross domestic product) growth number looked strong, but this was mainly due to rapid inventory accumulation. Growth has disappointed everywhere in the world this year, not least in the developed economies.
How optimistic are you on the projected growth trends for economies like Japan and Europe? What about China and the development roadmap it has laid for the next 10 / 20 years?
I am not at all optimistic about the growth trends in Japan and Europe. Both regions have enormous underlying structural problems, and very little political will to address those issues. The contrast with China could simply not be any starker: China is almost addicted to reforming and ensuring that it realises its long-term growth potential. I am vastly more bullish about China than Europe or Japan.
Could these regions be the next growth engines for the global economy over the next two-three years? Why / why not?
China is and will continue to be a growth engine for the global economy. The rest of emerging markets (EMs) will also continue to be by far the strongest growing regions of the world. Among the HIDCs (Heavily Indebted Developed Countries), I would expect the US to recover first, but this only means that the US gets inflation and currency weakness ahead of Japan and Europe. The US recovers first because it recapitalised its banks early, but its debt stock is so big that only a protracted period of inflation and currency weakness can erode it.
Within the emerging market pack, India has been able to attract around $17 billion in foreign institutional investor (FII) flow despite macro-economic challenges. Do you think the pace and quantum of flows will continue in 2014 as well?
India's economy will bottom out around 4% growth. India has, over the last few years, been spending too much and importing too much. But the economic team has been dealing with these problems by cutting back government spending, raising interest rates, and weakening the currency. These are the classic cures for an excess demand problem.
Moreover, investors are looking beyond the current political lame duck period to a possibly more decisive government after the next elections. The long-term outlook for India remains extremely strong. Barring very short-term investors and those who mistake volatility for risk, who have been selling, many other investors clearly recognise the country's long-term potential.
What is your overall call on the Asian and emerging markets over the next 6–12 months, especially India? Do you see a risk-on phase returning or has the best already played out? What next for the Indian markets that have seen all-time highs after nearly six years?
Phrases such as 'risk-on' and 'risk-off' are meaningless. They pander to very short-term sentiment which most of the time has no relation to the underlying rationale for investing in a country or a region. The key focus of investors should be value: Are asset prices cheap enough that the likely return exceeds the potential risk? In Asia, and especially in India, the answer is unambiguously yes, especially after the sell-off of in the past few months. EM asset prices remain well below those of developed economies, but EM countries are not saddled with the horrible structural challenges of the HIDCs.
Do you think the worst is over when it comes to the rupee, inflation and the country’s twin deficits (fiscal and current account deficit) or can things can go horribly wrong once the US Fed starts the taper? What are the key numbers you are working with?
The strong reaction in EMs, including India, to the Fed's tapering announcement in May was due to two specific factors. First, the Fed announcement coincided with a bad technical overhang in the market after a long bout of speculative buying of EM fixed income by hedge funds trying to front run Japanese institutional flows. This technical overhang is gone and hence the next time the Fed tapers the reaction will be far more muted.
Second, a few countries had entirely self-inflicted problems due to poor economic management. This was the case of India. In most cases, the imbalances are being or have been addressed, so the vulnerability is lower.
Besides, fundamentals in most EM countries are now stronger than they were at the start of the year. The IMF's World Economic Outlook from October 2013 for example predicts stronger growth in every EM region of the world next year
How do you see corporate earnings panning out over the next few quarters? Do you think there are sustainable green shoots of recovery visible in any of the sectors?
Corporate earnings will pick up on the back of the slow recovery in the economy and further once the election uncertainty is out of the way. A return to trend growth is both extremely likely and totally sustainable.
Which sectors / stocks are you overweight, underweight on in the Indian context and why? What is your debt market strategy and the outlook on gold, crude oil and bond yields?
We do not comment on positioning. But we like to invest strategically and we like sectors that tap into domestic demand in India. As for gold, oil, and bond yields, we think EM bond yields are attractive versus developed market bond yields in the next 12 months, but that the long end of the US treasury curve will become increasingly volatile, so we prefer shorter duration exposures.
Oil and gold prices will remain volatile, but both commodities have a bright future. Gold because US inflation will push up prices. Oil because the supply situation is weak and when global demand recovers, so will oil prices.
There have been mixed signals from the US Federal Reserve (US Fed) regarding the taper of its bond buying programme. What do you make of the recent statements and the economic data coming from the US?
The US Fed wants to scale back QE (quantitative easing) because continuous money printing is creating a bubble in stock markets. The Fed's problem is how to scale back its purchases of government bonds without causing the government bond curve to blow up. Rising bond yields hurt the US economy because of its enormous debt load (405% of GDP excluding some additional 300% of GDP in unfunded long-term social expenses).
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How optimistic are you on the projected growth trends for economies like Japan and Europe? What about China and the development roadmap it has laid for the next 10 / 20 years?
I am not at all optimistic about the growth trends in Japan and Europe. Both regions have enormous underlying structural problems, and very little political will to address those issues. The contrast with China could simply not be any starker: China is almost addicted to reforming and ensuring that it realises its long-term growth potential. I am vastly more bullish about China than Europe or Japan.
Could these regions be the next growth engines for the global economy over the next two-three years? Why / why not?
China is and will continue to be a growth engine for the global economy. The rest of emerging markets (EMs) will also continue to be by far the strongest growing regions of the world. Among the HIDCs (Heavily Indebted Developed Countries), I would expect the US to recover first, but this only means that the US gets inflation and currency weakness ahead of Japan and Europe. The US recovers first because it recapitalised its banks early, but its debt stock is so big that only a protracted period of inflation and currency weakness can erode it.
Within the emerging market pack, India has been able to attract around $17 billion in foreign institutional investor (FII) flow despite macro-economic challenges. Do you think the pace and quantum of flows will continue in 2014 as well?
India's economy will bottom out around 4% growth. India has, over the last few years, been spending too much and importing too much. But the economic team has been dealing with these problems by cutting back government spending, raising interest rates, and weakening the currency. These are the classic cures for an excess demand problem.
Moreover, investors are looking beyond the current political lame duck period to a possibly more decisive government after the next elections. The long-term outlook for India remains extremely strong. Barring very short-term investors and those who mistake volatility for risk, who have been selling, many other investors clearly recognise the country's long-term potential.
What is your overall call on the Asian and emerging markets over the next 6–12 months, especially India? Do you see a risk-on phase returning or has the best already played out? What next for the Indian markets that have seen all-time highs after nearly six years?
Phrases such as 'risk-on' and 'risk-off' are meaningless. They pander to very short-term sentiment which most of the time has no relation to the underlying rationale for investing in a country or a region. The key focus of investors should be value: Are asset prices cheap enough that the likely return exceeds the potential risk? In Asia, and especially in India, the answer is unambiguously yes, especially after the sell-off of in the past few months. EM asset prices remain well below those of developed economies, but EM countries are not saddled with the horrible structural challenges of the HIDCs.
Do you think the worst is over when it comes to the rupee, inflation and the country’s twin deficits (fiscal and current account deficit) or can things can go horribly wrong once the US Fed starts the taper? What are the key numbers you are working with?
The strong reaction in EMs, including India, to the Fed's tapering announcement in May was due to two specific factors. First, the Fed announcement coincided with a bad technical overhang in the market after a long bout of speculative buying of EM fixed income by hedge funds trying to front run Japanese institutional flows. This technical overhang is gone and hence the next time the Fed tapers the reaction will be far more muted.
Second, a few countries had entirely self-inflicted problems due to poor economic management. This was the case of India. In most cases, the imbalances are being or have been addressed, so the vulnerability is lower.
Besides, fundamentals in most EM countries are now stronger than they were at the start of the year. The IMF's World Economic Outlook from October 2013 for example predicts stronger growth in every EM region of the world next year
How do you see corporate earnings panning out over the next few quarters? Do you think there are sustainable green shoots of recovery visible in any of the sectors?
Corporate earnings will pick up on the back of the slow recovery in the economy and further once the election uncertainty is out of the way. A return to trend growth is both extremely likely and totally sustainable.
Which sectors / stocks are you overweight, underweight on in the Indian context and why? What is your debt market strategy and the outlook on gold, crude oil and bond yields?
We do not comment on positioning. But we like to invest strategically and we like sectors that tap into domestic demand in India. As for gold, oil, and bond yields, we think EM bond yields are attractive versus developed market bond yields in the next 12 months, but that the long end of the US treasury curve will become increasingly volatile, so we prefer shorter duration exposures.
Oil and gold prices will remain volatile, but both commodities have a bright future. Gold because US inflation will push up prices. Oil because the supply situation is weak and when global demand recovers, so will oil prices.