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Markets will break through the drags and head higher: Jan Dehn, Ashmore Group


Indian markets are likely to continue marching north even as there are negative factors such as bad loan issues at banks and surging oil prices, said Jan Dehn, head of research at Ashmore Group, a UK-based investment management firm dedicated to the emerging markets. The macro worries are unlikely to derail Indias growth, Dehn told Sanam Mirchandani in an interview. Consumer stocks are Dehns top bet in India as domestic demand is picking up.

Edited excerpts:
Indian markets are up 8-9% from the recent lows despite macro worries. Do you see more upside?

We are seeing robust domestic demand. Some of the drags that were holding back some businesses and perhaps consumers as well, such as implementation of GST, are also becoming less of an issue. There are signs that the bank credit is beginning to ease up. We still have some serious issues in the banking sector to deal with, with NPL issues and so on. The other issue is the trade balance and the current account deficit. We are heading into political season going forward.

I think they (Indian markets) are going to break through that and go higher. Indias economic expansion is sustainable. The current account deficit and NPL issue at the banks are not negatives that are so large and so significant that somehow they are going to derail Indias growth. They are simply going to be drags on the expansion. I dont see oil prices rising to the level where they become a really serious issue for India.

Ultimately my base case is also that we are going to have political continuity as a result of the elections in 2019. There is a small possibility that we may have to end up with some kind of coalition government or something. That wont be hugely surprising at this stage in the political business cycle but broadly speaking I dont see any of the factors derailing the story in India. So I would expect the stock markets to continue to rise and ultimately hit new high at some point over the next year or so.

Is the trade war risk over for emerging markets?

It is primarily a bilateral issue between the US and China. The global economy has now become so deeply integrated due to globalisation over the last couple of decades that old style protectionism is not really going to work anymore. The room for successful trade wars are only possible in two spaces. One is the simple products and the other one is if you focus on individual countries. The US has focused its protectionism efforts on China because the country is the only one that it can do anything about without having a meaningful effect on its own economy. China of course will hit back in proportion with what the Americans are doing but they are not going to engage in that broad drive for protectionism. In fact, I expect the Chinese to continue to open their markets further going forward.

How do you expect the rate hike cycle of the US Federal Reserve to pan out going ahead?

There is no doubt that all the central banks in the western world have now reached the important point, because they are getting to full employment and inflation is beginning to rise that they are going to have to raise interest rates. One of the reasons why there is a lot of volatility and uncertainty in the markets right now is because the markets are not clear about how fast the Fed is going to go and also not quite clear about what effect it will have on the world economy.

My view is that the Fed is not going to do that much. They are certainly not going to raise rates so much that they are going to be in the course of a recession. If they cause a recession right now they will have a real problem. The Fed has already hiked 175 basis points so far and we know that if the US goes into recession the average rate cuts by fed in a recession is more than 500 basis points and so basically if we get a recession now we cant get out of it. The Fed is probably going to hike about three times this year and that is absolutely enough.

There is risk that the inclusion of China A-shares to the MSCI Emerging Market index will affect weightage of India. What are your thoughts?

We will see a steadily growing allocation to Chinese shares within all the benchmark indices not just stocks but also in bonds. We will see a rush of interest in putting money into China both into stocks and bonds over the next several years. This is undoubtedly going to increase Chinas share in these indices and some of that share will undoubtedly come from lower share of India. Indias markets are not in any of the global bond markets yet because India still maintains quotas and therefore it is not going to get its fair share of global finance in fixed income anyway. As China becomes more and more integrated to global financial markets we will see that it has huge benefits that India unfortunately is missing out on.

Will there be huge outflows from India as a result of China A-shares inclusion in MSCI EM index?

No. As countries get into indices, their weight is stepped up very gradually. As China shares goes up, India share will go down as well but there will also be reduction in shares from all other markets so it is not India alone that is going to pay the price, everybody will. But of course it is good for investors because we get more diverse indices and more diverse indices are clearly good for investors.

Do you expect the Reserve Bank of India to hike rates going ahead?

We are primarily going to see hawkish rhetoric intended to keep inflation expectations under control but not a huge shift in interest rates because at the moment actual inflation is not a big problem.

What are the investment themes that interest you in India?

The big bet in the next year or two is the consumer stocks. The domestic demand is picking up. So I would bet on the consumer story continuing in India and put my allocation towards assets which benefit from that.

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