Foolish to dump India now; want access to bond mkt: Ashmore

The second factor that has created a bit of a sour note, if you wish, for foreign investors is the ongoing uncertainty arising over tax issues for foreign portfolio managers, fund managers operating in the Indian space. The uncertainty surrounding the retrospective taxation of returns in these funds, I do not have a bone to pick with the Indian government over its taxation but one thing is clear that there has been, in retrospect, considerable amount of uncertainty about exactly the tax regime is. That uncertainty is a real negative for investors. Investors do not mind paying taxes but they want to know what they are going to be paid and when they are going to be charged for it. Therefore, I think the government needs to clear up this mess on taxation as quickly as possible and if it does so we will look back on this moment without too much concern because it doesn’t detract very much from the broader outlook for India which remains quite positive.

Latha: Foreign institutional investors (FIIs) that enter India through a tax treaty country like Singapore, Mauritius, we understand have not been received any draft notices. What would you like to hear from the government? You said you want clarification. What do you want to hear? A: I do not think a clarification of tax regime would in any way deter long-term investors; in fact a clarification of the tax regime would encourage foreign investors. The situation, whether it is for money that is coming in directly or through so-called treaty countries, remains that of considerable uncertainty. That uncertainty has to be cleared up once and for all and as quickly as possible otherwise the risk is that this becomes a much bigger problem. It starts affecting the perception that investors have about India, the perception that India is open for business and it becomes much larger domestic political issue as well and then it becomes so much more difficult to resolve that it ends up having economic ramifications that are not only disadvantages but also completely unnecessary. So what we need now is leadership, clarity and then we need to move on.

Sonia: For now due to lack of clarity on taxation front, have you changed your view on India maybe pulled out some money in the recent past or are you still bullish for the long-term? A: No I haven’t. As you correctly pointed out I have been following India for a long time. I remain bullish on the Indian story. There are a lot of technical going through the market right now but the Indian story is going to be with us for some time. I think valuations have got a bit tight, technical are a bit excessive but these are very short-term considerations. I believe strongly that India is still on the right path and there is more reward for those who want to be invested there. My only regret is that the government is moving slowly in terms of opening its market to fixed income investors. It is bizarre that there is free access for anyone who wants to trade the currency or to trade into equity markets, defector free access, but bond markets which tend to attract much more long-term institutional flows that tend to be far more stable than equity markets, are still in effect barred from access. This particularly at a time such as now when there are some questions raised over the situation particularly in the equity market, you can see that equity markets can very volatile, bond market would be a nice buffer at this point, would be attracting flows even as foreigners pull out of the equity markets. Therefore, my doubt is not whether I want to invest more in India. My frustration is that I cannot invest anymore than I already have on account of the quarters that apply to fixed income markets. Latha: In the near term – do you expect to see more downside for equities. As I told you we are already 8 percent down from the recent highs? A: I think we still have some question marks hanging over the Indian markets; technical, the tax issue and the currency angle as I alluded to before with the recent adjustment that we see in oil prices. I think these external factors will have to play themselves out and there is still some adjustment to be done in the market on the back of that. The story though remains intact. We are likely to see particularly in the second half of this year a great pick up in the economy, we are also going to see further easing from the Reserve Bank of India (RBI) and that is going to start driving earnings higher towards the second half of this year. Earnings have been somewhat lackluster than had been anticipated. We haven’t seen a stronger domestic pickup in the economy as had been expected and this is weighed on earnings. But part of that is to do with weather-related effects and droughts and so on. But some of it also has to do with a slow pace of investment by corporate in India. However, the upside is still ahead of us, it just means that the earnings pickup comes little bit later than what have been expected. I think the market do have a little more adjustment to go through at this point.

Sonia: Just to compare the India versus China story – where are you deploying incremental money between India and China? A: I think there is a technical trade in China which has barely begun. The Chinese have rightly, in my opinion, recognised that the current global macroeconomic conditions are nowhere near equilibrium and when growth starts picking up inflation will pickup and then it will be very difficult for western central banks to raise rates materially because there is too much debt in their economies and that does suggest that over the next couple of years we are going to see return of inflation. However, for China that is a major threat with the largest reserves in the world, the Chinese renminbi is likely to be the strongest performing currency in the world over the next decade – that will make it very difficult for Chinese economy to export and so the Chinese have recognised this and are in the process of making a wholesale adjustment towards domestic demand lead growth. As they increase domestic consumption in China, they will be importing more and in order to finance these imports in the balance of payments, they are liberalising their capital account – that is opening their domestic markets to foreign investors both in terms of equities and in terms of access to fixed income. Therefore, when you then take into account that -- between them the domestic equity and fixed income markets in China are close to USD 10 trillion in size – it’s just a formidable number and when you take into account that foreign investors have practically no exposure to these onshore markets. We are really looking at an enormous technical which has not even begun to be priced into the Chinese market. I think this is going to be extremely supportive for the domestic markets in China and as China’s currency becomes a global reserve currency by possibly as early as late this year, December of this year when the International Monetary Fund (IMF) has its meeting to decide whether to include the renminbi or not. China is moving into completely different gear and then will once again leapfrog ahead of India – that doesn’t mean that there are no interesting opportunities in India but India is still trading its own domestic recovery trade from the last administration; the internal reforms that are going on, the cyclical upswing, the slowdown in inflation and so on. This is a cyclical story in India. China story on the other hand is a structural reform story and as such it is a much bigger opportunity than what is currently on offer in India.