As the global markets prepare to brace the impact of the outcome of elections in the United Kingdom and the meeting of the US Federal Reserve (US Fed) on key rates over the next few days, JAN DEHN, head of research at London - based Ashmore Investment Management that oversees around $52 billion in emerging market assets tells Puneet Wadhwa that investors should use the volatility to rebalance their portfolios. Edited excerpts:
How important are the polls in the United Kingdom (UK) for stability in the global financial markets?
This, obviously, is an important event for the UK markets. For the European Union (EU), however, it is important, albeit to a lesser extent. For the test of the world it is irrelevant in a fundamental sense. This means that any short term volatility in the global markets arising from this election should be exploited to build positions / take profits in any assets which temporarily get mispriced.
Do you think that the global equity markets are headed higher over the next six - eight months? What are the key threats to the rally?
Global equity markets will drift higher, because central banks are still on very easy policies and I don't see that changing. In addition, we will continue to see allocations to emerging markets (EM) rise due to outperformance versus developed markets (DMs).
We like EMs. The noise in Saudi and the UK should not deter investors from the opportunity in the EM. India is a big and important market. We like bonds, forex and stocks with a strong value proposition, especially those with cyclical upside potential. However, Latin America is still a superior opportunity to India.
The Indian story is solid and there are no big obvious threats to stability. A correction would have to come from external markets and should be exploited to reset longs in Indian stocks. I like the small and mid-cap segment, based on my positive view of financial inclusion and growth.
How are you viewing the developments relating to the implementation of the goods and services tax (GST) bill in India?
No change in my view. The GST is an excellent step and much needed modernisation of the Indian tax code, which will have long-term positive benefits, including raising India's trend growth rate.
Which sectors and stocks are you overweight and underweight in the Indian context?
I like private sector financials, cyclical stocks and consumer stocks. This is a story of economic recovery following a period of uncertainty caused by important positive reforms. Going ahead, investors should have a domestic bias, i.e. look at economy related plays. Consumption will rise, the rupee will rally and capital will flow into India to support the cyclical upswing.
Pharma and information technology are two sectors that now seem surrounded with problems. Is there a way out, and what's your advice to investors in this backdrop?
We have been underweight these sectors. They are vulnerable to US protectionism. Investor will be better off if they exit these two sectors and focus on sectors relating to domestic demand.