US govt shutdown bad sign, won't help EMs: Ashmore

There is a high probability that the US government may shut down which may once again see rating agencies taking another look at the country, says Jan Dehn, Ashmore Investment Management. He quotes the case of 2011, when rating agencies downgraded the US Treasuries,  which in turn triggered a three-month bear market globally. 

According to Dehn, the initial reaction of the shutdown will be negative but the downside will be limited.

Also Read: What would happen if the US government shuts down?
Meanwhile, he believes it is unlikely that markets will consider emerging markets as a safe haven bet just because the US government and the Italian government have problems. It is actually difficult for banks and pension funds, insurance companies to seek refuge in EMs even if they wanted to, he adds. Below is the verbatim transcript of Jan Dehn’s interview on CNBC-TV18 Q: What is the possible chance of a US shutdown - the eighteenth in the history of US government?
A: The likelihood of shutdown in the US government is pretty high. The Senate and the House of Representatives have passed different bills for the continuing resolution and it is very difficult to see how they reconcile those. So, government shutdown looks quite likely.
That in itself is not going to be hugely material, because it is only non-core services in the US government that will be shut down. However, it is a very bad sign for the next vote, which the government has to deal with in the US which is the debt ceiling vote, which is coming up late in October. If they fail to agree on that then we are looking at default on US Treasuries. Q: For the near-term, in case there is no resolution and there is a partial shutdown of the government, what will be the equity market reaction? When you say material, are we likely to see the US and the European indices trending lower by about 3-5 percent? What will be the immediate reaction?
A: The initial reaction will be negative, there will still be a lot of people who will look through this and say, at the end of the day it is game of chicken and neither Democrats nor Republicans are ultimately willing to go all the way and trigger a default on the US Treasuries.
So, the downside will be limited. However, there is outside risk that rating agencies come back and take another look at the US government’s rating. Last time, when we had a situation like this, the US Treasuries were downgraded and that triggered a three-month bear market globally in 2011.
We also have to factor that the Italian government was dissolved this weekend and that introduces new uncertainties in the Eurozone. The similarities between the US government’s problems and the Italian Government’s problems are both about fiscal policy. These are both heavily indebted developed countries struggling with fiscal issues and that underlines the actual risk that exists in countries that have such large debts. Q: Within this entire gamut of things, where would you place emerging markets (EMs)? Would there be increased allocation of money just to diversify risk by fund managers globally and where would India stand in this picture?
A: It is funny because there is lot of confluence of different dynamics right now. The flow numbers have begun to turn positive in EMs after about 17 weeks of outflows. We have seen stabilisation in EM currencies including the Indian currency, the Brazilian currency and others that have been the target of short selling over the summer.
It is unlikely that markets will consider EMs as a safe haven bet just because the US government and the Italian government have problems - that is not the pattern we have seen in the past. Unfortunately, even though that would actually be quite a rational thing to do because EMs fiscal and economic conditions are vastly stronger than those in developed economies, it has not been the case in the past. The regulatory system itself biases against EMs through different capital requirements and so on.
Therefore, it is actually difficult for banks and pension funds, insurance companies to seek refuge in EMs even if they wanted to.n of Ashmore Investment Management spoke about global markets.