We have about a year until markets once again become frothy: Jan Dehn

DEHN, head of research at Ashmore Group, tells Puneet Wadhwa in an interview that this is a good time for investors to shift to cyclical stocks

As the markets begin Samvat 2077 at a fresh all-time high amid a hunt for a Covid-19 vaccine, London-based JAN DEHN, head of research at Ashmore Group, which has nearly $100 billion worth of assets under management, tells Puneet Wadhwa in an interview that this is a good time for investors to shift to cyclical stocks. Edited excerpts:

How are global investors viewing the US poll outcome?

The conclusion of the election removes a major element of uncertainty. This is positive for the markets. However, there are still important unknowns, which will continue to gradually dissipate, including (president-elect) Joe Biden’s choice of policies, the Senate race, and the state of the economy. International relations will once again be dealt with in a more institutional and consensus-seeking manner, which bodes well for stability. Protectionism will not get worse, but may take some time to normalise because it is never easy to lift tariffs during economic downturns. 

Can the emerging markets (EMs) outperform over the next one year? 

Global — and especially EM equities — should do well. In the US, we will get a stimulus, while many parts of EMs are recovering and not showing signs of new waves of Covid-19. The near-term outlook in Europe and to some extent in the US is pricing in a Covid-19 resurgence. Growth rates in EMs will be far stronger than those in DMs (developed markets), so earnings will get a better lift. 

With the Indian markets at an all-time high, should one book partial profits? 

Global investors have almost no money in EM equities, including Indian equities. Covid-19 cases are declining. The economy has spare capacity. The Reserve Bank of India (RBI) is supportive. Indian equities can therefore rally further, but investors need to watch out. As soon as the economy even gets close to full capacity, we will see inflation rates rising and the RBI will have to act, or investors lose confidence in the currency. 

Will India be able to attract incremental foreign flows compared to other EMs over the next one year? 

Prime Minister Narendra Modi was a strong supporter of (outgoing president) Donald Trump. He will have to reach out to Biden now and make sure that good relations continue. The main issue in India is that inflation rates are already elevated and the government has come to rely more on stimulus and less on reforms in recent years. This is one of the big structural differences between India and China and the main reason why the latter has more sustained high growth rates than India does. India needs to refocus on increasing the flexibility of the economy. Opening up for foreign investors in bond markets would be a good start, but India still does not appear to be serious about leaving behind its past as a centrally planned economy. 

What about earnings? 

A recovery in corporate earnings requires that the Covid-19 situation improve further. There is room for the economy to pick up in a non-inflationary manner due to spare capacity. In my view we have about a year until the markets once again become frothy. It is a good time to swing into cyclical stocks. However, be mindful that we are late cycle and the government some time ago gave up on supply-side reforms, so the cyclical upside is strictly limited. 

Your overweight and underweight sectors in the Indian context? 

We have a kind of barbell strategy. On the bullish side, we have a favourable view towards financials, specifically the larger private banks that are well capitalised and have further differentiated themselves from their peers in recent years with meaningful upgrades in their technology platforms. This, we expect, will enable them to take meaningful market share over the coming decade. 

On the more cautious side, we favour: (a) necessary over discretionary; (b) exports over local demand; (c) business leadership (more important in tough times). However, a near-term risk is another spike in Covid-19, especially after the Diwali festival, which could usher in a double dip in local demand for discretionary items like autos and appliances that may have seen pent-up demand/festival purchases in recent months. Both are very difficult to predict, though. The other risk is the urban poor who have been hit hard by loss of jobs/wage cuts over the last six months. That said, we are in a position to further risk up our portfolio. 

What strategy should one adopt for commodity-related stocks? 

It is not clear to me that global growth will display a strong pick-up in the next 12 months. Europe and the US will be very slow and struggle to recover from still rising Covid-19 cases. China will be steady. The main improvement in growth will come from EMs, but that will largely offset slower growth in developed economies. Hence, global growth as a whole will remain sluggish. This means that we will not see a strong surge in prices of commodities, including oil. This should favour India.