 "We remain invested and will increase allocations to India: Jan Dehn")
The outlook for emerging markets looks better than what it has been for many years, UK–based Jan Dehn, head of research at Ashmore Investment Management that manages $52 billion in assets across markets, tells Puneet Wadhwa. While being positive on India, he says the valuations here are very high compared to many other markets and it is important to be disciplined in picking stocks. Edited excerpts:
The markets are touching new highs at a time most economists are lowering global growth forecasts. Should investors be worried?
It is many years ago that the markets began to ignore fundamentals and focus instead on stimulus measures. This has resulted in a perverse situation where bad data often leads to market rallies, due to the expectation of further easing from central banks. This is, of course, a phenomenon that is particular to the developed economies, where central banks are buying financial assets (QE). Ultimately, this behaviour is unsustainable. The market is clearly not putting high odds on material tightening. So, for now, the weaker global growth data is only leading to expectations of more easing and, hence, higher asset prices.
Bonds in developed markets are in a bubble. The best evidence is European corporate bonds, where around 15 per cent of outstanding securities now pay negative yield. This is insane. Negative corporate bond yields are prima facie evidence of bubbles. Zero compensation for duration, liquidity and credit risk makes no sense.
Policy makers will do everything in their power to avoid a bursting of the developed market fixed income bubble, as it would be an economic disaster. They are more likely to employ financial repression to force institutional investors to buy more paper. This is not good for them but other investors should be grateful that they can sell their holdings.
What is your message to fixed income investors?
That there actually are excellent opportunities in global fixed income markets, outside of QE-sponsored markets. Emerging market (EM) bond yields are high and debt levels are lower. EM local currency bonds are under-owned and technicals are, therefore, very strong. Best of all, they pay five–six times more yield than developed markets’ bonds and, year-to-date, their currencies are up versus the dollar. In a world screaming for yield, there is plenty of good returns to be had in EMs.
What is your outlook for EMs?
It looks better than for many years. Global markets have been caught in a giant momentum trade where institutional investors have allocated money according to one criterion only, namely, buying the same markets that were sponsored by the QE central banks. This hurt EMs a lot but the tide is now turning. The QE markets pay no yield and populism is rising sharply. Brexit (the British vote to quit the European Union) is a good example of the kind of economic risks that are now present in developed markets. By contrast, EMs are cheap and with resilience proven during the shocks of recent years. The QE momentum trade of the past few years is giving way to a value trade, i.e where investors like to buy paper where there is some connection to healthier fundamentals. On that measure, EMs win hands down.
Are you looking to increase exposure to India in the next one year?
We have remained invested in India and we expect to increase the allocations this year and in the years ahead, especially as global asset allocators plough more money into the EM asset class.
What are your current underweight and overweight sectors in India?
We like cyclicals and consumer stocks in particular. I think the macro economic backdrop is improving and prospects of the goods and services tax (GST) Bill make India interesting. Valuations in India, however, are very high compared to many other markets; so, it is important to be disciplined in picking stocks.
We are not bullish on the banking and information technology (IT) sectors. We like sectors that are related to domestic demand, particularly consumption, and also plays on infrastructure investment and transportation.
How are investors viewing progress on the government’s reform agenda?
I don’t think foreign investors are yet positioned for GST. They should be looking at this very seriously. It is the single most important economic reform India can do. It promises to dramatically reduce transport and other costs to trading within India, as it creates, in effect, a single market. This should usher in economies of scale, a wave of mergers and acquisitions and greater efficiency and, therefore, higher growth in India.
The markets are touching new highs at a time most economists are lowering global growth forecasts. Should investors be worried?
It is many years ago that the markets began to ignore fundamentals and focus instead on stimulus measures. This has resulted in a perverse situation where bad data often leads to market rallies, due to the expectation of further easing from central banks. This is, of course, a phenomenon that is particular to the developed economies, where central banks are buying financial assets (QE). Ultimately, this behaviour is unsustainable. The market is clearly not putting high odds on material tightening. So, for now, the weaker global growth data is only leading to expectations of more easing and, hence, higher asset prices.
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What is your assessment of bond markets? Given the falling yields, is this bubble waiting to burst?
Bonds in developed markets are in a bubble. The best evidence is European corporate bonds, where around 15 per cent of outstanding securities now pay negative yield. This is insane. Negative corporate bond yields are prima facie evidence of bubbles. Zero compensation for duration, liquidity and credit risk makes no sense.
Policy makers will do everything in their power to avoid a bursting of the developed market fixed income bubble, as it would be an economic disaster. They are more likely to employ financial repression to force institutional investors to buy more paper. This is not good for them but other investors should be grateful that they can sell their holdings.
What is your message to fixed income investors?
That there actually are excellent opportunities in global fixed income markets, outside of QE-sponsored markets. Emerging market (EM) bond yields are high and debt levels are lower. EM local currency bonds are under-owned and technicals are, therefore, very strong. Best of all, they pay five–six times more yield than developed markets’ bonds and, year-to-date, their currencies are up versus the dollar. In a world screaming for yield, there is plenty of good returns to be had in EMs.
What is your outlook for EMs?
It looks better than for many years. Global markets have been caught in a giant momentum trade where institutional investors have allocated money according to one criterion only, namely, buying the same markets that were sponsored by the QE central banks. This hurt EMs a lot but the tide is now turning. The QE markets pay no yield and populism is rising sharply. Brexit (the British vote to quit the European Union) is a good example of the kind of economic risks that are now present in developed markets. By contrast, EMs are cheap and with resilience proven during the shocks of recent years. The QE momentum trade of the past few years is giving way to a value trade, i.e where investors like to buy paper where there is some connection to healthier fundamentals. On that measure, EMs win hands down.
Are you looking to increase exposure to India in the next one year?
We have remained invested in India and we expect to increase the allocations this year and in the years ahead, especially as global asset allocators plough more money into the EM asset class.
What are your current underweight and overweight sectors in India?
We like cyclicals and consumer stocks in particular. I think the macro economic backdrop is improving and prospects of the goods and services tax (GST) Bill make India interesting. Valuations in India, however, are very high compared to many other markets; so, it is important to be disciplined in picking stocks.
We are not bullish on the banking and information technology (IT) sectors. We like sectors that are related to domestic demand, particularly consumption, and also plays on infrastructure investment and transportation.
How are investors viewing progress on the government’s reform agenda?
I don’t think foreign investors are yet positioned for GST. They should be looking at this very seriously. It is the single most important economic reform India can do. It promises to dramatically reduce transport and other costs to trading within India, as it creates, in effect, a single market. This should usher in economies of scale, a wave of mergers and acquisitions and greater efficiency and, therefore, higher growth in India.