China slowdown overplayed; India story intact: Ashmore

Not withstanding the improvement in the last few hours, the stock markets globally have been in the downtrend. Jan Dehn of Ashmore Investment Management finds two distinct factors causing this —one, growth issues in US and two, equity concerns in China. Speaking about the volatility in Chinese stock market, Dehn said he does not see Chinese equities as vulnerable as people think. His favourite market remains China though he would not buy the index now. He likes Indian equity market index too despite the fall on the back of global issues. In next 12 months, volatility in Chinese equity will be firmly resolved and people will start focussing on that market again. So global backdrop will be considerably benign 12 months from now and there is a "liklihood of breaking higher than lower" in next one year.Asked if Fed would postpone rate hike programme in view of the global volatility, Dehn said soft equity mkt will definitlely weign on Fed sentiments. The talks have been around since 2012 and we haven't seen one rate hike till date, he said. Asked about expectation from Indian apex bank, Dehn said there won't be any change in rates. Now it is upto the fiscal side to take the economy forward, the RBI has done what it could, Dehn said. Below is the transcript of Jan Dehn's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Latha: Notwithstanding the last 18 hours of equity improvement, generally equities and commodities have been suffering from serious losses. What's worrying the global financial markets so much and do you think this downtrend has more legs? A: There are two primary reasons for it. One, the US equity market is struggling to make gains. We are flat for the year and growth as a whole has disappointed and there are signs that the strong inflows into American assets has now pushed the dollar up to a level where it is beginning to adversely impact US growth and that is an important backdrop. The other reason is that we have had a lot of volatility in the Chinese stock market and a lot of people are drawing inferences from stock market volatility in China on to the growth outlook for China. Personally those parallels are too exaggerated. I don't think Chinese growth is as vulnerable to equity market volatility as the market seems to think but at the moment those two factors are weighing heavily on the outlook both for equities and commodities globally. Sonia: Will this make the Fed postpone its rate hike timetable? A: The Fed is a lot more sensitive to equity market valuations that many give them credit for, after all this is a central bank that is basing its entire recovery strategy on reinflating asset prices. I think soft equity market performance is definitely going to weigh on the Fed sentiment. Let's not forget that the very first predictions of Fed hike came as early as 2012. We are now in 2015. We still haven\\'t seen a Fed hike. I really think the Fed wants to hike interest rates, not because it wants to stamp out rampant domestic demand but simply because it wants to put down a marker to show that it is making some nominal progress towards a very distant objective of monetary policy normalisation. The latest data, the latest volatility in the stock market will probably have shifted the Fed\\'s intentions a little bit further into the future probably closer to December than to September if I have to place a guess here. Sonia: What is your pecking order among equity markets for the rest of the year? A: My favourite equity market right now is the H-share market in China. It is trading with a seven handle on 2016 forward PE - that's less than half of the valuation of the US equity market. I also think that the A-share market is beginning to look interesting; it is now priced at lower valuations than the US equities on 2016 forward price earnings basis. Of course there is some volatility in the Chinese market and I do not think it is wise to buy the index. I think there are an enormous range of companies in China and many of them are excellent world beating companies and all of them have been treated in exactly the same way as a result of the very rapid surge up in prices and then the very rapid decline. I think there are definitely value opportunities within the Chinese equity market index. I quite like the Indian equity market index as well. It has gone down a bit on the back of the global negativity that we have seen but the India growth story remains solid. We have seen investments in India on the public sector side beginning to make progress. I expect that is going to lead to complimentary investments in the private sector and that in turn will give rise to gradual consumer lead recovery in the Indian economy. So we are looking at a trajectory for the Indian economy which looks not only positive but actually looks very sustainable to the future and that is good news for equity holders. Latha: The Nifty has been meandering between 8,000 and 8,600. Will it break on the downside or the upside rather than the downside? What kind of return you are expecting over 12 months? A: I think even where we are now and how negative sentiment is globally; I think there is potentially quite a lot of upside here on 12 months basis. I think over the next 12 months we will certainly have the volatility in the Chinese equity market quite firmly resolved. I think China will have made lot of progress in terms of entering into the special drawing rights (SDR) basket for the International Monetary Fund (IMF); people will begin to again focus on Chinese reforms rather than short-term volatility. I think the Fed hike will be out of the way, that will be bullish for credit markets and emerging market (EM) in general. So I think the global backdrop is on a 12 months horizon, the global backdrop is going to be considerably more benign than it is now. I think 12 months from now we will be in the middle of a very strong bounce in private sector investment and the start of the quite serious consumption in China. So all these factors, both the domestic business cycle within China and the external environment should be very supportive for Chinese equities, so on a 12 month basis the likelihood is that we break higher rather than lower. Sonia: If you are betting on the economy returning are you betting on stocks like Larsen and Toubro (L&T) and banks in the Indian market? A: Yes, I think we are looking here at a sustain cyclical upswing started with investment and then giving rise to consumption, so I think we are still looking at more investment oriented sectors that are likely to do well at this point in the cycle than later on giving rise to better performance in consumer durables and cyclical but that comes a little later in the stage. So I really like selective exposure to certain financials and also to certain industrials and even parts of construction sector provided that you can filter out the companies that have balance sheet problems from those that don't. So it's more of an investment intensive focus in terms of sector allocation at this point in my opinion. Latha: Some state owned banks like Punjab National Bank (PNB) reported slower growth in bad loans. Do you like any of these banks? A: That's consistent with the view I have had on the state of banks that there is improved governance in state of banks. They are being run on a more technical basis and with less political interference at senior levels in the banks and this is beginning to show up in improved balance sheet matrix. This is helped by the pickup in the broader economy so it's a combination of better managements of these banks and also more benign economic backdrop. I think that's beginning to bear fruit, so that's positive. Sonia: Are you buying any of them? A: Yes. Sonia: Which ones would they be? A: I am not going to go into specifics, securities, I hope you will understand that it is not my money, it's our clients' money, it will be a bit like telling you people what's in your current account. Latha: What will be the sectoral distribution of your incremental stock picks? A: I expect the economic performance to be primarily led by investment related activities, initially from the government side and then subsequently moving more into the private sector, so we are really looking at sectors that are exposed to the government investment program, this is indirectly banks, directly more construction, infrastructure, those type of sectors where the upside is going to come initially. Sonia: What are you expectations from the Reserve Bank of India in its credit policy next week? A: I think the Reserve Bank is likely to stick to its current position and not change rates. I think the signal from the last meeting was quite clear, the RBI has front run its easing, it took a chance early on in the business cycle to cut early, there was even some criticism of the RBI for doing that but it was proven right to do it and it has provided the support of macroeconomic environment for the government to get on with the tough task of building consensus around its reform programme. So the RBI has done what it should do. It is now over to the fiscal authorities, the government authorities to begin to deliver on the investment side to deliver further on the reform side and then to let the economy respond. So I think the RBI is going to stay passive and not change its monetary policy. Latha: What kind of returns do you expect from the Indian markets in 12 months or in 18 months? A: I think we have considerable upside. We have about 10 percent upside at least based on my expectations from the Indian economy. Latha: What is the in-house view on crude? We saw a slight improvement overnight? A: It is little bit lower than I had expected at this point. We have seen quite a lot of pullback in supply in many sectors especially in the United States but the truth is that in an environment that as risk averse as the market feels right now there is a bid for dollars because of risk aversion. The fears about global growth on account of the performance of the US economy and particularly fears about China slowdown which I do not think are very well founded but because of these fears are driving the market, I wouldn't be surprised if the momentum to the downside for crude will continue a little further but I do not think it has much fundamental basis as people think. So we could also see a snapback. The range that we are in now, we are certainly towards the lower end of that range, of course this is positive for many, in fact for the bulk of the world's economies that are oil importers and it is also positive for India as an oil importer. However, for now the Indian economy should enjoy but I do not think there is a strong fundamental reason to believe that the prices should go a lot lower from here.