Emerging markets are still very cheap: Ashmore Investments

Global markets have been volatile over the last few sessions. In an interview to CNBC-TV18, Jerome Booth, Ashmore Investments says emerging markets are still remarkably cheap. "I think there is still a very bullish feeling about emerging markets. There is much more upside," he adds.

Also read: Germany must act to solve euro crisis, says George Soros Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee. Q: Could this be a corrective phase or is it just a pause in global markets? A: I think there is still a very bullish feeling about emerging markets. A lot of money has been made in a lot of markets this year. So, some profit taking, at some point, is likely towards the end of the year. Last week, we had a little bit. But I do not think that is taking away, at the moment, from the general upward trend in the western markets. In the emerging markets, prejudice is being shed. There is much more upside. Equity markets are still remarkably cheap, currencies are going to move. They have not moved anything like as much as they are capable of yet. Q: Some of the worries that investors were fretting about a few months back seem to have receded for the moment. What do you worry about most now? A: Problems in Europe and US are serious. The so called ugly contest between the two continues. One should not underestimate that this problem can drag on for years and years more. Deleveraging is a very painful process. In the longer-term, the dollar has potentially more weakness than the euro, ofcourse if euro survives and there are credible mechanisms in place to ensure its survival. But the short-term problems remain more acute in Europe. We have concerns still over Spain in particular. There have been delays over Spain requesting assistance. But I think this is partly not down to Spain, it is down to mechanisms being in place. So, when it does request help, there is actually credible response. Q: Do you see the US as posing some problems for global equity performance in the next couple of months? A: I think the issue in the United States revolves around the dollar. The increase of around two trillion in purchases of treasuries over the last couple of years has been all down to emerging market central banks. And that is what has kept the dollar where it is. If we are now entering a world where there is much more money printing and potentially becoming inflationary over the medium-term then that will create a natural desire to exit at some point. You combine that with some fiscal indiscipline and lack of resolution about what to do about fiscal imbalance, which I think is probably the outcome of the fiscal cliff, the alternative is that you do not have more stimulus and you get much more severe recession. But if you get that stimulus and it looks to be inflationary then you have a problem on the dollar as central banks start to not buy anymore treasuries, but even eventually to sell the ones they have. That process has already started after the advent of QE3. _PAGEBREAK_ Q: What is your expectation from China? While there are all lots of people who are quite bearish about the way growth is coming off, there is a segment that believes that the new leadership, which takes charge in November, might re-stoke things with the stimulus package. What do you think their likely outcome could be? A: China has had some very good data actually today. We have got GDP later this week. Obviously, it is a snapshot anyway. But the enormous effort in China to move towards the demand-led model of growth is very real. And I have no doubt, in my mind, that atleast 7.5 percent growth rate is very sustainable and probably higher. There is a psychological need by a lot of people to have an excuse not to invest in emerging market. Talking about the Chinese slowdown is one of those things. We are seeing very vigorous, very strong domestic led growth. China, like a lot of emerging markets, has quite frequent data releases on exports and other statistics related to the external sector. The data relating to the domestic consumption is actually much less frequent. So, we get constant stream of news about maybe a slowdown in exports to Europe and external sector without sometimes remembering that China is still a very closed economy, as is India, as is Brazil, as is Indonesia. And what really matters is actually what the domestic consumers are doing. That is healthy. I don't really see major problems in China. I also see in China and a lot of other emerging markets, a renewed focus on infrastructure and building. This is very commodity-intensive. It means that that is good for commodity exporters. It means that a country like India has to continue to cope with oil prices, which are reasonably high. The best way to do that is ofcourse is to have a stronger rupee, have currencies appreciate because 50 percent of the inflation in India is caused by that oil price. Q: What about India? Have you been encouraged by what you have heard from the government over the last four weeks? A: I think it is very encouraging. It has already had a positive impact and there is a positive feedback mechanism. We saw more confidence in the government’s opening up measures, reforms. This has led to appreciation of currency, this has led to lower inflation expectations and allowing central banks to cut rates with credibility. We are going to see stronger sense of growth potential, more investment and private investment in the economy, particularly which was held back delays over concerns of inflation, over growth. So, I think there is a virtual cycle now. It is important that government keeps at it. Politically also it seems to be working because although we have a change in the coalition, the government is winning politically. It seems to have got its message across that this is vital. At the end of the day, what do people care about? They care about stability and growth and jobs and low inflation. That is what the government is going to deliver. It is certainly striving to do that. So, I think we are in a very positive dynamic. Foreign investors are still probably underweight India. There is huge amount of potential, further upside in the currency and therefore in the cycle as well.