‘Plays on Govt In­fras­truc­ture Should Do Well, But Pick Stocks Care­fully’

The Economic Times - - Money -

The sta­bil­i­sa­tion of the US dol­lar is help­ing to chan­nel funds back into emerg­ing mar­kets, in­clud­ing In­dia, said Jan Dehn, head of research at Ash­more Group, which man­ages funds worth over $50 bil­lion. In an in­ter­view to Biswa­jit Baruah, Lon­don-based Dehn said in­vestors are un­der­weight on emerg­ing mar­kets as a whole, but when flows come back, In­dia will ben­e­fit too, de­spite they be­ing al­ready over­weight. Edited ex­cerpts

What do you think of the US Fed’s stance on in­ter­est rates? The FOMC just re­duced its ex­pec­ta­tion for hikes in 2016 from four to two. It may re­duce them fur­ther. The US econ­omy is be­hav­ing like an econ­omy where rates are al­ready at 5%. The fact that rates are only 25-50 bps should give rise to con­cerns. It will not be easy for the Fed to hike rates with­out caus­ing a great deal of dam­age to growth and as­set prices. And if they hike, the dol­lar goes up fur­ther which kills ex­ports, man­u­fac­tur­ing and shale. The Fed will err on the side of dovish­ness, in my view.

Your im­pres­sion of the re­bound in In­dian mar­kets since March... I think dou­ble-digit re­turns are likely for In­dian fixed in­come, sup­ported by a sta­ble to ris­ing cur­rency, high ab­so­lute yields, be­nign in­fla­tion and a dovish Fed. Eq­uity re­turns are likely to be more mod­est this year due to the poor earn­ings out­look in the US and higher val­u­a­tion in In­dian stocks com­pared to other emerg­ing mar­ket economies.

Will the for­eign fund in­flows sus­tain in such an un­cer­tain sce­nario? I think for­eign flows will be sup­port­ive this year. The sta­bil­i­sa­tion of the US dol­lar is help­ing to chan­nel funds back into emerg­ing mar­kets. In­vestors in gen­eral are un­der­weight on EMs as a whole and when flows come back, In­dia will ben­e­fit too, even if in­vestors are al­ready over­weight. The real key to fur­ther up­side is fur­ther in­vest­ment by re­tail in­vestors within In­dia.

What are the next big mar­ket trig- gers in­vestors should be look­ing for­ward? Gov­ern­ment in­fras­truc­ture in­vest­ment is likely to be an important im­pulse. The macro back­drop will also be sup­port­ive. The (gov­ern­ment’s) sen­si­ble Bud­get means that in­fla­tion will re­main un­der con­trol, so the cen­tral bank will not have to hike. On the other hand, GST now looks less likely, which is a real dis­ap­point­ment be­cause of In­dia’s real po­ten­tial and there­fore the big up­side risk to stocks rests with elim­i­nat­ing in­ter­nal bar­ri­ers to trade.

Which are the themes in In­dia that in­ter­est you? PSU banks have po­ten­tial, but it is important to pick the right cred­its. Pri­vate sec­tor banks are less risky, but more ex­pen­sive. Plenty of ac­tion in the power sec­tor where coal and trans­mis­sion looks promis­ing. Mid-cap energy in­fras­truc­ture builders should do well. Plays on gov­ern­ment in­fras­truc­ture should do well, but pick stocks care­fully to avoid over in­debted com­pa­nies.

What is your out­look for the ru­pee? As the US dol­lar sta­bilises we should see ru­pee sta­bilise too, or even rally.

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