US market moves not in sync with economic fundamentals: Jan Dehn

The biggest worry now for the US market is that the price action and underlying fundamentals are getting a bit out of line with one another, says Jan Dehn of Ashmore Investment Management in an interview to CNBC-TV18.

Dehn says a lot of temporary factors are driving the markets now and urges investors to be careful.

There is definitely some squaring up of year end positions and a high degree of US investors might even be selling bonds and moving into stocks. While risk events are out of the way, there is no sync with economic reality like low productivity in US which may worsen with trade protectionism, strengthening of US dollar which may sap competitiveness of US economy and rising yields.Below is the verbatim transcript of Jan Dehn’s interview to Surabhi Upadhyay on CNBC-TV18.Q: What is the sense? A lot of experts are talking about this 20,000 level. Do you think it will sort of go there any time soon?A: I have no idea, it is a coin toss. Whether it moves 40 points or not. The view I have more broadly is that there is a lot of temporary factors driving this and investors should be pretty careful. Remember we are heading into year end. So, there is definitely a degree of year end positions squaring. There is also a high degree of US investors selling bonds and moving into stocks instead and then of course we have had a number of risk events leading into the fourth quarter, including the Fed hike, the European Central Bank (ECB), the Italian referendum and so on. And all of these factors create an unusual but fairly low liquidity directionality in the market which is going to not be sustained verify into 2017 because it is getting a little out of touch with the economy reality.Productivity in the US is low and if we are going to have more trade protection in the US that is actually going to worsen US productivity. The dollar is extremely strong and in real exchange rate terms that is sapping competitiveness of the US economy and of course yields are going up, that is the real big change this year compared to previous years and we have already seen mortgage applications fall by some 30 percent since July. So, that is the discrepancy I am worried about here that the market price action and the underlying fundamental seems to be getting a bit out of line with one another.Q: What about all this talk about whether this new US government is going to be great for Corporate America, so they cut down taxes, companies make more money and life is beautiful what you say to that theory?A: Well, it sounds to me that the two mechanisms by this is envisaged to happen is a reduction in taxes and increase fiscal spending and perhaps some trade protection as well and certainly the net fiscal spending might have worked very well back in the early 80s when Reagan was president, because at that time the overall debt level in the US economy was a fairly modest 160 percent of GDP and of course interest rates were very high and falling and that meant that consumer spending could pickup as debt service costs were falling, but today Trump inherit an economy with more than twice as much debt 330 percent debt to GDP and interest rates rock bottom likely to rise, which will eat into consumer spending.Of course, we have the situation here where the core inflation rate is already above the Fed target of 2 percent and if we then increase spending at this point, we are going to probably create more inflation than growth.