Jan Dehn of Ashmore Investment Management thinks that the US stock markets are due for correction. He told CNBC-TV18 that now Europe has Outright Monetary Transactions (OMT) program or bond- buying programme, under which the ECB can buy unlimited amounts of (short-dated) government bonds, if required to lower bond yields. He says it means the correction expected in the second quarter is going to be milder than last year's.
According to him, the markets are looking for a change in positioning and will respond to weaker data.
Talking on gold his opinion is that it is quite risky from a valuation stand point. He believes that if the economy shifts down in the second quarter, then gold also has little bit of downside risk. However, he does not think it will fall rapidly.
The central banks are still buying and holding gold. Therefore, Dehn feels, the prospect of inflation is going to provide some support in the gold market.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: How crucial is the non-farm payroll number? Do you think that if they came as per expectations, we are going to see another bout of buying? What will you watch out for up until the end of the week?
A: I do think the US stock markets are due for correction. Second quarter data looks pretty weak from here. Manufacturing cycle is clearly turning. Since the last payroll report which was very weak, the market has essentially been on life support in the form of easing or promises of easing from the various central banks.
However, I think the Fed minutes this week were very clear. They are now conditioning the direction of their intervention heavily on the data, which way the data goes. So basically, if they get stronger, they will consider moving towards reducing the support for the market. If it weakens then we will get more support.
That essentially means that they are putting more volatility into the stock market. I will say one thing though that there is one positive here. Unlike the second quarter last year when we were in a very similar situation, this year, there is no obvious source of clear and present danger or systemic tail risk in the near term. Mainly because we have the Outright Monetary Transactions (OMT) program in Europe. That means that correction that we are expecting in the second quarter is going to be milder than what we saw last year.
Q: There seems to be another problem developing. The economic data that we are getting not just from the US but from Europe as well as from China and Japan are routinely weaker than ever expected and yet you see the stock markets rising because of this infusion of money by the central bank. Do you think there is a danger of asset bubble? Do you think some sharp corrections are possible or do you think that infusion of money is going to prevent any sharp correction?
A: I do think the markets will respond to weaker data. I just think that the corrections will me milder. What really fuels as a very sharp correction in the second quarter last year was not just that the data turned weak as you remembered. We had a weak payroll number on April 2, but it was then possible for the market to focus in on some very clear, systemic potential tail risk in Europe.
This as you correctly suggest are now left even. That means that what we are looking for here is nearly a change in positioning, cleaning up of position more so than the market trying to price in a tail risk. That does suggest that the market will have a milder correction than last year.
Q: How do you see the emerging markets move for the rest of the year? If your belief is that the developed markets could face some caution or resistance, do you think emerging markets have the potential to outperform developed markets for the rest of the year?
A: It depends on which asset class you are thinking about. In general, I would say that it is going to be a fairly normal year for emerging markets. Last year was a particularly strong one. That was really because we came off some completely ridiculous valuations at the end of 2011, where the markets had been caught up in fear about Greece and Europe which had spilled over into emerging market asset prices.
Some of that mis-pricing came out last year resulting in very high returns, particularly in fixed income. This year we are expecting somewhat more normal year in fixed income. Still very decent returns particularly compared to the returns that you get in developed markets.
I think in the second half this year we are really setting ourselves for quite a nice balance both in local currency assets, stocks and local currency bonds compared to last year. So, I think local currency assets are actually going to perform better this year than hard currency assets. The time really to get into positions in emerging market will be during some kind of correction in the developed markets, which we are sort of seeing beginning to unfold here in the second quarter. So, I think this is when you need to sort of start putting your money to work really and then the outlook looks pretty good.
Q: The reason I ask this is because for emerging markets like India, a big relief has come in the form of the fall in crude and gold prices as well that we have seen over the last couple of weeks. In your indication, for two of these metals, do you see further downside or do you think they could stabilise around these levels?
A: Gold has obviously sold off a lot, then it has bottomed and back rallied a lot since the big sell off. That big sell off was essentially triggered by the expectation of a big dump of gold by the Cyprus central bank. As we know, gold is actually quite illiquid market. Gold no longer serves any particular monetary policy function. So, its value is socially determined as long as people believe it will stay valuable, but if sentiment changes then it can crash. In my opinion, gold fundamentally is actually quite risky from a valuation stand point.
However, I think if I am right that the economy shifts down somewhat in the second quarter, then I think gold has little bit of downside risk from here. However, I don’t think it will fall too fast because the medium term inflation outlook in developed economies in particular is really quite bad. We know that central banks are still buying and holding gold. So, I think the prospect of future inflation is going to provide some support in the gold market.
Q: What would be your top three investment asset classes at the moment? Separately, what’s your take on crude? We saw it tumble along with gold but seem to have stabilised at around USD 100 per barrel for Brent. What’s your sense of how crude might move?
A: I do think oil has a little bit further to go in terms of declining and that’s basically conditional from my view that the economy is heading into a quarter of slower growth, basically on account of the turning of the manufacturing cycle. In the second quarter of 2012, oil took a pretty big tumble from around USD 125 per barrel all the way down to USD 90 per barrel as the market came off from pretty unrealistic highs in the first quarter.
We have a similar pattern this year. Now of course, as I mentioned earlier, this big fall in oil last year was certainly aided by concerns about serious tail risks in Europe and the fear that Europe could completely collapse. That risk of course is somewhat less pronounced this year.
So, I think there is very strong support for oil in the USD 90’s per barrel. All of this really is short term volatility as far as I am concerned. If you look at the slightly longer term outlook for oil there is basically an energy shortage globally. The world is still growing especially due to strong growth in emerging markets.
We are expecting about six percent real GDP growth across emerging markets this year. The world needs to meet these energy demands arising from growth in emerging markets. What we can hope for really is that shale and other sources of energy begin to come online over the next few years. Otherwise, once the crisis is behind us and developed markets start growing then I think it is quite likely that oil could go much higher and that could then stamp out the recovery. So, we really need new energy sources to come into the market over the longer term.