Tapering may happen in Sept; see value in EMs: Ashmore

Jan Dehn of Ashmore Investment Management feels that US Federal Reserve will begin tapering of its monthly bond buying programme after its September 19 FOMC meeting. He says that it is likely to happen this year itself. It is a good thing for the market as it will prevent bubbles from QE and ensure a sustainable recovery, he told CNBC-TV18.

On emerging markets, he believes that the rationale for such areas had never changed and a lot of value has been created now. Also read: Still comfortable with long-term India holding: StanChart Below is the edited transcript of his interview to CNBC-TV18. Q: What is your sense that you might hear from the FOMC on September 19? A: There is talk of tapering. It has been in the market for a while and it is going to go ahead; not so much because the economy needs tighter monetary policy. It doesn’t have it now as there isn’t a lot of growth and inflation. The QE easing policy has been an addiction where the stock markets are now more focused on what data will do for the prospects of more quantitative easing going forward, than it is about what data will do for earning and that is not a very healthy situation. So, tapering is likely to start in September at the latest a bit later in the Q4 but certainly this year. It is likely to be wound down over a period of 12 months and that is a good thing. The US market need to be weaned off, the sugar highs that comes from quantitative easing (QE) to prevent bubbles and to ensure that we get a sustainable recovery. I think that is going to happen. Q: What is your sense about recent correction we have seen in emerging market currencies and equities? Do you think that the correction is over? Do you see more pressure coming on the rupee, the rupiah and such currencies? A: Emerging markets; fixed income has been completely oversold. Emerging market local bonds are now trading at yields that were last seen sustained at such levels when US 10-year treasuries were trading at 5 percent. At these levels, in bond markets and emerging markets and also equity market, there is value. It does raise the prospect that emerging market fixed income and possibly equities as well are going to be the best performing asset classes in the world over the next 12 months, particularly when you look at the pick up that we are seeing across emerging markets in terms of economic fundamentals. The irony is that emerging market fundamentals never deteriorate. Emerging market fixed income universe or the investing universe now comprises more than 60 countries and we have had a couple of countries, India included that have some macro economic adjustment but even countries like India, Indonesia, Turkey and Brazil which have been the focus of the market have never seriously even gotten close to a crisis situation, they are managing the macro economic adjustment. The selloff that we have seen over the summer months has been technical in nature. There was a huge amount of technical build-up in the market, in Q2 particularly which had to be unwound, some of that flow is still happening but institutional investors, long-term investors that follow emerging market closely recognise that the underlying rational for being an EM hasn’t changed at all and actually a lot of value has been created here. Q: We have seen foreign institutional investors (FIIs) inflows to the tune of Rs 4,000 crore or significant buying from FIIs in the cash market in the past four decades for India in particular. Do you then assume that the investment has already started turning for India and FIIs could continue portfolio allocation now? A: Those investors that are value focused will recognise that there is value here. The currency has deteriorated --from foreign investor perspective the currency has dropped 20 percent and there is macro economic adjustment. Remember, the type of problem that India faces is the one that is solved with a bit of currency devaluation and then a domestic demand adjustment both of which have happened. So, India is already now moving away from the brink and offers a value. Now, there are couples of issues that are going to weigh on sentiment. First of all market is still very focused on the September 18 for Federal Open Market Committee (FOMC). It still is a major source of uncertainty until it is behind us and behind that come a debt ceiling issue. The debt ceiling issue is a serious issue and the vote that may or may not happen on US strikes against Syria will be very important to watch here. Congress is quite strongly against President Obama and if Congress has said so it will by saying that it does not want to support strikes. If it comes to a vote then that bodes very poorly for the prospects both of a piece of resolution to the debt ceiling issue and also of course to the vote that will eventually have to happen over who is going to replace Ben Bernanke at the Fed. So, there are number of uncertainties but what is important to note about those uncertainties is that they have nothing to do with emerging markets. They are as most of these sources of uncertainties are coming from the heavy indebted developed countries that are struggling in many ways both politically and economically.