 "Jan Dehn")
Despite devaluing its currency and cutting interest rates, Chinese authorities' efforts to soothe market's nerves have proved futile. UK-based Jan Dehn, head of research, Ashmore Investment Management, which manages nearly $59 billion in assets across markets, believes China is not in crisis but is reforming. Falling commodity prices, a strong reserve position, sound domestic policy and a cyclical upswing will support the outlook for India, he tells Puneet Wadhwa. Edited excerpts:
What is your interpretation of the global stock market crash last week?
It would be wrong to blame the market volatility on emerging markets (EMs), including China. Sure, China is slowing due to its ambitious programme of reform, which is causing considerable uncertainty. However, China and other EM events would not be able to impact global markets to this extent if there were not deeper problems elsewhere.
The main problem is that asset prices in developed economies have rallied so far on the back of quantitative easing (QE) money, while fundamentals have been neglected. This has left the market very stretched in terms of valuations, with little or no obvious direction from here. Moreover, if the developed economies actually slow down then they have no means of stimulating the economy.
A slowdown is inevitable, though the timing is unclear. This knowledge has rendered the market rightly feeling nervous. And, EMs take the brunt of this nervousness, as always. Seen in this light, EM events are the canary in the coalmine, early indicators of bigger problems elsewhere.
What, according to you, are the key risks to global markets?
The single biggest risk in global markets is that investors suddenly catch on to the fact that almost all the gains made in US stock markets and in the European fixed income markets over the past four years have been achieved by printing money. Hot air. If it was really possible to get rich on a sustainable basis simply by printing money, there would probably be a bit more of it going on across the world. Of course, you cannot get rich by printing money. Eventually, the value of the printed money is eroded and, hence, a major correction in developed economies is inevitable. But the timing of the correction hinges critically on when inflation returns. No one expects inflation in developed economies any time soon. With this view firmly entrenched, the risk is clearly that they are proven wrong.
Do you think that the next leg of the downside could be led by developments across euro-zone, especially Greece that has been in the news again?
No, Greece is resolved for now. They have been given another bailout and pensioner are taking huge losses without even being aware of it. The real risk is coming from the US. If the US Fed goes ahead with monetary tightening there will be nothing to support the US markets, which have been propped up by hot air for years. If the US Fed tightens monetary policy European bond yields will also rise, but this will prove challenging for the extremely heavily indebted European economies, especially the periphery. This is why US Fed hikes can prove challenging.
China's measures to stem the market fall have proved futile. Even the yuan's devaluation hasn't helped much. What are your thoughts?
We are not experiencing a crisis in China. We are experiencing a country that is reforming more than all the other countries in the world combined. With that many reforms, consumers and investors are nervous and the economy is slowing. Liberalisation of markets initially attracts speculators, hedge funds, banks and retail investors, while the institutional investors take longer, because they need to do due diligence, appoint external managers and wait for indices. This means that markets can be volatile.
But, this should not detract attention from the bigger picture: China is doing reforms to put itself in a position to win tomorrow. Few other countries are doing anything even remotely as ambitious. China will, therefore, have the last laugh. I think the dips in China are good investment opportunities.
What about India?
The picture across Asia is extremely varied. It does not make sense to generalise across such a diverse set of markets. India is one of the brighter spots. The economic cycle is on a gentle upswing and policy credibility has dramatically improved, due to better fiscal and monetary policies. The fly in the ointment remains Parliament, which seems bent on maintaining a very myopic perspective on India. India has huge potential, but Parliament holds back the country. Nothing new, however, and it is not something that derails the outlook. It merely means that India does not perform quite as well as it could.
In the Indian context, do you think the fall could get aggravated due to domestic factors such as policy logjam, weak corporate earnings, etc.?
No, I think India is insulated from much of the volatility. Falling commodity prices, a strong reserve position, sound domestic policy and a cyclical upswing will support the outlook for India. Currency weakness, to the extent it happens, will support India's balance of payments without much pass-through to inflation.
What are your sector preferences?
I like banks and discretionary consumer spending. Construction is tricky. Many companies are still under water, so one needs to pick carefully among names within this sector. I like industries that source commodities as inputs to production, but commodity exporters will be challenged for some time.
How do you think that the Reserve Bank of India (RBI) react to the global situation?
All central banks want to cut if they can. But RBI will only cut if it is responsible to do so. I think RBI will keep an eye on its inflation fighting mandate and act accordingly. As it should do. The global volatility – at least not in the current form – will not seriously impact the Indian economy. A more serious loss of credibility in developed economies is more worrisome. It could happen, but likely not yet.
The big challenge in the developed economies would be the return of inflation. Inflation would force central banks to choose between price stability and recession due to the weak underlying trend growth rates and high debt levels. Not a nice dilemma and the central banks will likely favour growth over inflation.
What does it all mean for corporate earnings growth in India? To what extent are the markets factoring in a sluggish growth?
Not as much as people think. Indian markets ought not to price in a major slowdown. To the extent that they do it will be a buying opportunity in my view.
