US mkts pricing in tapering delay: Ashmore

Jan Dehn, Co-Head of Research of Ashmore Investment Management presents his views on the US markets on the back of the ongoing impasse between US bureaucrats. He expects a short-term solution for the shutdown very soon.

Also read: Why US default might not spook treasury market Below is the edited transcript of his interview to CNBC-TV18. Q: Do you think that there could be some amount of a break in the impasse this evening in the US? A: It does look like the US is moving towards some kind of short-term deal. The market is buying that rumour and has in fact been buying it for a while. It sets us up the market. The nature of the deal that has been talked about now and it remains to be seen whether it will hold up is a very short-term deal. It raises uncertainty about whether the house of representatives will agree on the terms agreed in the Senate. It has to be done by December, but then we are talking about only increasing the spending limit until January 15 and the debt ceiling until February 7. This will keep a lot of uncertainties in the very near future even if they strike a deal and avoid the debt ceiling debate right now. US stocks, in general, are now pricing in obviously a solution to the debt ceiling issue. They are also pricing in the delay to tapering and good data when in fact we haven’t had any release. So it seems to me that the US stock market is flying a little bit on harder area. Q: If you do get that short-term solution to the shutdown, to the debt ceiling, just extending it up until early February, how will the stock markets react? Will there be a correction in developed markets? A: The stock markets have been pricing in a very benign outcome for the last few weeks. You need to see this in the ongoing rally in the stock market. It is also pricing the fact that these political shenanigans will make the Fed on balance biased towards more easing or delaying tapering. The widespread expectation is now that tapering will not happen until March next year. It is taking the best of all world. I am pricing that right now. It raises the possibility that once we get to a short-term solution, the market will then begin to look forward to the next obstacles, which as you pointed out will probably not be very fine to the future. Q: As we talk, the DAX is at a lifetime high. What would an investor’s approach be towards European equities now versus US equities? A: Certainly the economic momentum in Europe has improved. We are seeing a pick up in the manufacturing cycle in some of the economic data. We just had a strong data recently out of Germany, but it is important to remember for investors that they don’t just have a choice between the US and Europe. Both of those regions are heavily indebted, they have major structural problems. There are no easy solutions to their problems and that is why they find themselves in quite difficult political circumstances, where even such basic things is passing an increase in the debt ceiling proves to be a major obstacle. This is a symptom of much broader, deeper, structural problems and investors would be well advised to keep away from investing in regions where there are such major underlying structural political problems and instead put their money into emerging markets. Fundamentals are much healthier here. There is much less debt and where the growth prospects are much healthier.