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