See Nifty @9400; developed mkts seem like freak shows: Ashmore

Speaking to CNBC-TV18 Jan Dehn of Ashmore Investment Management said that the NPL of public sector banks is a big problem.

He also spoke about global jitters saying that there are multiple global threats. Development economies are looking like freak shows, he said, adding that asset price valuations are distorted there. “There is a complete neglect of economic reform. They are indebted and productivity is low,” he said.

He believes that EMs are through headwinds despite their magnitude. “There is a limit to how far the development economies can impact fundamentals,” he said. The technical fundamentals for EMs are looking good, he said. We estimate the developed market pension funds have halved their exposure to EMs.

Regarding Nifty, he said that he expected the index to head up closer to 9400. “We are on the cusp of the reversal of global flows out of EMs and India looks extremely good in the global context.”Below is the verbatim transcript of Jan Dehn's interview to Anuj Singhal and Latha Venkatesh on CNBC-TV18.Latha: The Reserve Bank cut interest rates yesterday by a quarter percent and even appears to indicate that it will settle for a lower neutral rate, which means some more cuts are in the offing, your comment as an investor?A: That was the right decision. We would certainly expecting that, there has more benign outlook for inflation. The rains have been decent, food prices have sort of moderating and real yields are high enough given the inflationary risks, but this was a sensible move. There is also a supportive backdrop in the global currency market in favour of emerging market (EM) currencies in general.I think Indian bonds and Indian equities are for upsides, so we should expect a relatively positive supportive environment from international investors coming into the Indian market.Anuj: In that case would you think the rate cuts will do to the economy and what would be on your buying list?A: The environment is kind of favourable for both here with the inflation environment moderating and the market sort of getting used to the new monetary policy committee (MPC), there is a case for supporting fixed income, but I also think that the consumer story is beginning to pick up. We are seeing this in the demand for vehicles, we are seeing it in the demand for two-wheelers and we are seeing it in the consumer credit numbers. In addition to that we have some technical playing into the equity market particularly the national pension fund beginning to allocate more to equities, which I think is supportive and the consumer story also supportive, so I think we are sort in a goldilocks environment, where both bonds and stocks are going to do reasonably well in the near future.The main risks to that are going to come from abroad as we get close to yearend, there was going to be the usual positions squaring from international investors. People are going to focus on the possible Fed hike in December and of course we have the US election, but these are really non-Indian risks so not something we should be particularly worried about.Latha: Nevertheless I will come to the global cues in a bit, but first what earnings growth are you expecting and therefore what valuations will you give. For that matter are you comfortable with current valuations?A: Valuations in Indian stock markets are stretched I would say, so I am not expecting a massive and dramatic rally, but I do expect that we are going to see sort of a slow gradual grind higher and the reason for that is that I see a better earnings outlook on the back of more consumption led growth going forward that should support stocks particularly in the consumer sensitive sectors and more cyclical sectors.There are other sectors in the economy the more investment related traditional heavy investments such as power, roads, ports, infrastructure that sort of stuff. Energy where unfortunately there are still are quite material leverage issues and where there are also material non-performing loan (NPL) issues in the banking system and until those issues are properly addressed, the consumer story the main one that going to be driving the story and for that reason I would really focus on sectors that bypass those heavily leverage sectors.Anuj: Three legs to the financial sector then public banks, private banks and non-bank financial companies. Let me come to the ignored piece PSU banks are you buying any one of them?A: Very selectively and only when they become particularly cheap. I think there was a quite deliberate choice made at the top level of government between recapitalising the public sector banks or seeking passage of the goods and services tax (GST) bill and that was quite a deliberate choice and ultimately it was the right choice to go with the GST bill, but that does leave us with a public sector banking system that really has some underlying structural problems that need to be addressed and we still needs to see whether that becomes a priority for the government.There is talk about perhaps setting up perhaps a bad bank I think that will be a very good idea and that really sort of main thing holding back the Indian economy is that we do have this NPL problem that particularly affects the public sector banks, so my inclination is definitely on the private side selectively choosing the one that have the best balance sheets, because they are the ones who are going to be able to expand lending and take advantage of the move in a consumer sector.Latha: There is skittishness at higher levels with high equity valuations exactly at a time when yields are negative in these very countries or some of these countries. What kind of global jitters you see and when might this impact the equity party?A: There are multiple global threat, I am afraid that the developed economies are looking more and more like freak shows, their asset price valuations are dramatically distorted by years of quantitative easing (QE). There has been complete neglect of economic reforms.Central banks have practically no policy tools left in the event of a downturn in the economy. They are heavily indebted, they can’t grow and productivity is very low. So by far the biggest risk for the global economy is if one of the big developed market regions experiences major macro economic problems such as recession or of course if one of the European financials go belly up.This would definitely have a negative effect on sentiment globally and therefore also tend to affect flows in emerging markets, but I think emerging markets are being through an incredible amount of headwinds and gone through them very successfully despite the magnitude of these headwinds over the last 4 years. If you think about the taper tantrum pricing in the start of the Fed hiking cycle, 50 percent rally in the US Dollar and big fall in commodity prices has really been form major headwinds for EM and EM has come through partly because they have done reforms and partly because they have not lost sight of relatively orthodox monetary policies.There is a limit to how far the developments in developed economies can actually impact fundamentals. The technical position for EM assets in general including Indian assets is also quite good, when you look at it from a foreign investor perspective. We estimate that developed market pension funds have halved their exposure to EM over the last 4 years, so they are all underweight emerging market assets and that means there is not a lot of selling when we have bad events and potentially quite a supportive environment if investors began to allocate back to EM, which we actually think is beginning to happen now.Anuj: What kind of one year return can you expect in India? Do you see the Nifty going back to its previous high of 9,100 or even better say 9,400 or 9,500?A: I think we get somewhere in between those two. I think we are going to head up closer to 9,400 than 9,100. We are on the cusp of a reversal of the global flows out of EM that we have seen over the last 4 years and India looks extremely good in a global context here, because it has a strong reform record. It’s moved up a lot in the global competitiveness index because of the efforts to reduce red tape and the macroeconomic story looks very solid. We could well see the big surprise factor over the next 12 months or so could be the resumption of more significant flows from abroad into India and that could easily be the sort of the factor that pushes up towards the high end of that range.