Easy money is not going away: Ashmore Group head of research Jan Dehn

London-based Jan Dehn tells Puneet Wadhwa in an interview that if the finance minister and her team do not deliver on any of what they have proposed, the market can come off hard

Market participants heaved a sigh of relief after the government presented a pro-growth Budget that did not have any major tax implication for investment in the capital markets. 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 if the finance minister and her team do not deliver on any of what they have proposed, the market can come off hard. Edited excerpts:

How are you viewing India as an investment destination after the Budget proposals?

The Budget was more stimulatory than expected, including a significant boost to infrastructure spending, as well as privatisation. If the government delivers on its reform and infrastructure promises, India should have a higher trend growth rate which, in turn, should help stabilise public finances. On the other hand, if the government merely spends more without increasing the efficiency of the economy, this Budget will backfire and hurt the economy. In the near-term, however, investors will be jubilant because the larger spending promises will boost GDP in the near term.

How long do you think will the easy monetary policy of global central banks continue ?

Easy money is not going away. Central banks in developed economies have painted themselves into a corner. By focusing almost exclusively on pushing up asset prices, while governments have neglected to address structural problems in the wider economy, such as mounting debts, declining productivity, and frightening levels of debt, central banks have effectively inflated bubbles in the financial markets. These bubbles are so large that to remove accommodation at this stage will prove disastrous for their economies.

In 2021, there will be a general sense of recovery after 2020 due to the arrival of vaccines. This will bring with it higher markets and stronger global growth, as well as higher year-on-year inflation prints. However, all the underlying structural economic problems remain, and have, in fact, gotten worse, especially inequality and debt. As populations increasingly demand that governments address these issues, government spending will rise at the expense of the private sector. In this context, it is difficult to see meaningful tightening from the central banks in the US, the UK, Europe, and Japan. 

What does it mean for emerging market (EM) flows, especially India?

The fact that the big private sector recovery in developed markets is now slowly giving way to government-led growth strategies bodes poorly for equities in developed countries. Massive increases in government debt will also put upward pressure on yields in the government bond markets. The heyday of returns in the big quantitative-eased (QE) economies is therefore over. Capital will leave these markets and gradually make its way to economies where there is still yield in the bond markets and capital gains opportunities in the stock markets. EMs as a whole will benefit. The biggest beneficiaries will be those EM countries which are part of the main EM bond and stock market indices, because 99 per cent of the world’s investors are so-called index huggers.

India is not in the main EM-fixed income indices, so will only attract a small fraction of the money in fixed income (and typically only the speculative fast money variety of global capital). In stocks, India will get its fair share, along with other index members, though high valuations of Indian equities will probably ensure many investors choose to be underweight on India compared to other regions in EM.

Your overweight and underweight sectors in India...

Sector-wise, we like financials, which are well-provisioned, benefit from lower costs due to stronger economic activity, and should see improved loan recoveries and faster loan growth. We also like construction services, which benefits from infrastructure spending. Domestic discretionary demand should also benefit, supporting autos, leisure, entertainment, etc.

What are the key risks to the Indian markets?

There is a lot of hope and historically India has flattered, only to deceive. So if the finance minister and her team do not deliver on any of what they have proposed, the market can come off hard. Big fiscal in India has historically been associated with stagnation, witness the last Congress administration. The second risk is inflation — energy, import duties, supply constraints, etc, are all pointing to higher prices. I expect rates to be raised in Q3 or Q4 of this calendar year. Lastly, foreign inflows are a big component of market performance. Risks elsewhere in the world will influence short-term direction.  Our view is that global sentiment should improve in 2021 due to vaccines, better growth, and, importantly, a sane US president. 

In terms of upside risks, domestic high net-worth investors, who have been very active over the last 10 years or so have actually taken a lot of money out and are itching to get back in.