Jan Dehn, Head-Research, Ashmore Investment Management is not perturbed by the intense sell-off in Indian equities. The Indian story is far from over, he tells CNBC-TV18 in an interview adding government spending, particularly in infrastucture, will make Indian equities attractive again. Indices can rise as much as 10 percent in 12 months on policy actions and if GST is implemented one can expect 24 percent return on investments within 2 years, he said.
While advising investors to continue accumulating on dips as the market is poised to go up, Dehn revealed he likes cyclicals and financials where he sees a lot of value. "See value in downstream oil companies and industrials as well," he said while warning one to cut exposure to healthcare and defensives. He finds the government support to gas-fed power stations a big positive for the energy sector.
Below is the transcript of Jan Dehn's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: We have seen 8 percent correction from recent highs. Do you think it corrects even more, are you going to see a longish period of consolidation in Indian stocks?
A: I do not think this is a meaningful turning point and I do not think the positive India story is over. However, there was a nice run-up, valuations had moved up to level that were above long-term averages and given the more negative global outlook or global environment for stocks in particular, I think there is a bit of profit taking taking place here. I also think we have run out of catalyst to keep the Indian equity market rally going and people and earnings forecast have become a bit frothy relative to what we are going to see on the earnings front. We are still to see more government spending coming in infrastructure area, we are still seeing corporate being a little bit reticent about investing, they are basically refinancing but they are not refinancing for investment purposes, they are just refinancing their debt and we also had some detractors from consumer spending. Weather related effects, falls in some of the commodity prices like sugar and tea have also had a dampening effect on aggregate demand. Therefore, in a sense we are seeing an adjustment to these relatively short dated and relatively non structural factors and that is causing the correction.
The underlying story for Indian equities remains very strong. We are still in a goldilocks scenario, there are still reforms coming through, the government is making progress on a number of areas and this is going to sustain the India story and I do not think valuations are at level where there is no value in Indian stocks and finally the technical position in the Indian stock market is improving. Therefore, the way I would analyse this recent decline that we have seen in stocks is that it actually a very good opportunity to get the next bullet ready to fire into that market and to add into this dip.
Sonia: What would you be buying at this juncture if you had to incrementally increase your portfolio?
A: I am still very firmly of the belief that there is more cyclical upside in India. I like financials a lot. The drive to get more Indians to get bank accounts, the insurance reform and generally speaking the cyclical upturn in the economy amidst falling interest rates is an environment that is extremely good for financials and banks. Therefore, financials are banks are still an area where I see a lot of value because I believe in the cyclical story I also see value in industrials, I see value in downstream oil plays as well and on the other hand in some of the defensives, healthcare, in some of the staples. I do think that valuations are not attractive. So my favourite would be financials, industrials, downstream oil and I would be unwinding positions or have less exposure in healthcare and staples.
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Latha: Is there anything in the midcap space that you like because you have a keen eye for midcap stocks, don’t you?
A: I think one should always look at that space but it is more about picking selective individual stocks on particular companies based on good solid fundamentals rather than broadly buying indices. I have never been a big believer in index purchasing, I strongly believe in stock pick and there are opportunities within that space.
Sonia: Would you like the non-banking companies. Is there still rate trade over there or do you like them because many of them are exposed to commercial vehicle companies which could be doing well as we just heard because mining has started improving?
A: The mining story is an important driver here. The move towards coal auction is going to be very good. I also think there are some energy sector stocks; the government support for gas based power station which has been announced recently. This is a positive development, not just for the energy sector itself and the supply of energy and electricity in India which of course is always a welcome development but also because that allows some of these companies to begin to service some of their debts to banks and that then eases up the financial conditions and once the financial conditions ease up then you start seeing a more credit based recovery. Therefore, these are interesting developments.
Latha: There are companies like Torrent Power or GMR which have gas based power stations and there are public sector banks which lent to them. Do you like any of these?
A: I would stay clear of the names because I am not managing my own money. I am managing clients’ money and they wouldn’t want me to tell you what is there in their account.
However, I would say that state banks are another interesting play here. There has been a lot of improvement in governance of state banks and that increases their operational performance and that has not been fully priced in yet, so there is value in that space.
Sonia: The big space that has been moving of-late is the telecom companies. They have agreed to pay a lot for spectrum but they have secured spectrum for the next couple of decades. Would you still like them?
A: Its positive development that we have had these pricing. The pricings are not quite what was anticipated but the important point is to get pass these auctions and get to the point where the entire sector has a predictable outlook where these big transactions are out of the way so the companies can get on with a business of investing in the sector and that’s what lies ahead of us and that quite an exciting period.
Latha: What at an index level can they return in the next 12 months and how much can they return in 24 months?
A: The indices are going to be - both over 12 months and over 24 months given that we have seen 8 percent reduction recently. I think that has a little bit more to run but the upside after that is considerable. The big uncertainty is how far the correction goes in the US stock market but I alluded earlier, I think there will be a relatively modest correction. So given the levels where we are now and I would say that we are probably going to be somewhere in the region of about 10 percent over the next 12 months and maybe as high as 25 percent and even perhaps higher over 24 months and that is basically predicated on the view that I think that the government will get goods and services tax (GST) through. It is engaging in number of deals with states and cutting a lot of deals with state administrations and they will be able to get GST through in quid pro quo with states and that will be enormously beneficial for the Indian stock market. It has the potential to unleash not just the conventional economic efficiencies and not just better public finances which then in-turn allows the central bank to cut rate more but it also of course has the potential to unleash mergers and acquisitions boom in certain consumer sectors.
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