We trimmed exposure to India in the last few months, says Jan Dehn

India's economy will be okay, but the current account outlook is worrisome, says Dehn

Policy meetings of major central banks — the US Federal Reserve (US Fed), the European Central Bank (ECB) and the Bank of Japan (BOJ) — along with the Trump-Kim summit in Singapore kept markets on tenterhooks last week. Emerging markets (EMs), in particular, have seen some pullback recently. London-based JAN DEHN, head of research at Ashmore Investment Management, tells Puneet Wadhwa that he expects fund flows into EMs to resume by the third quarter of 2018. India, he says, will get a share of the pie. Edited excerpts: 

What is your interpretation of the Trump-Kim meeting? To what extent will it lend stability to global financial markets?

Very few investors are invested in North Korea. So, the impact on direct investments is small. The conflict on the Korean peninsula ranks as one of the world’s most dangerous geopolitical hotspots alongside the Middle East conflict and occasional tensions between nuclear powers Pakistan and India. North and South Korean forces have regularly clashed. Indeed, as recently as 2010, North Korea shelled a South Korean island. Hence, there is no doubt that a solution to the conflict will greatly reduce global geopolitical tail risks. 

How many rate hikes do you expect from the US Fed in 2018?

I think, the market expectation of three-four hikes is reasonable. The economy is humming after fiscal spending. The problems arise when the fiscal stimulus wears off, but everyone is too myopic or scared to worry about that. Other central banks should not respond much to the US Fed hikes. Ultimately, the rate of interest in each country should depend on inflation and growth in that country. US Fed hikes can lead to short-term capital flows, which may move forex rates and have a short-term impact on inflation rates, but central banks should look through such short-term effects. Only countries with bad economic policies should worry, in my view. Turkey and Argentina are cases in point.

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Do you think that the global equity markets are upward bound over the next six-12 months? Where does India figure in your asset allocation?

Yes, I think EM equities in particular are heading higher, while US equities will be tepid. India’s economy will be okay, but the current account outlook is worrisome. India needs to get more external financing to fund the current account deficit, but it can only do so if it opens its capital account to more foreign investment. Sadly, Indian policy makers lack the vision to see the importance of deepening India’s financial integration into the world economy. For this lack of vision and imagination, the Indian people will pay in the form of earlier and greater rate hikes from the Reserve Bank of India (RBI).

Do you see foreign institutional investors (FIIs) favouring developed markets or other EMs as opposed to India in the next one year?

Yes, I do. We have seen a pullback in sentiment towards EMs in the first half of 2018, but this is mainly profit-taking and should reverse once we get to the third quarter of 2018. I expect flows to EMs to resume. India will get a share of these flows, but less than what it deserves due to the outdated capital controls still in place in the country. 

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What are your key takeaways from the March quarter earnings season? Are markets being over optimistic on the likely growth in earnings?

No. I think, the earnings situation and outlook is solid. Consumers are on a strong footing. Global sentiment is a bit soft, but this can change quickly. The main risk is the current account.

Has the outcome of the elections in Karnataka made foreign investors cautious about the possibility of a hung mandate in the general elections scheduled for 2019?

Perhaps a bit, but I am not overly worried. India’s economy is ultimately okay, and a hung Parliament will not reverse recent reforms, though they may slow the approval of new ones.

What has been your investment strategy with respect to India over the last six-12 months? Which sectors do you prefer?

We have reduced exposure in India over the last few months as part of a broader reduction in exposure due to deterioration in the global backdrop. We like cyclically-sensitive sectors.