We have witnessed an eventful month for Indian and Indonesian markets as they continue to be driven down by a sharp decline in their currencies. Bond fund redemptions and increased noise on “tapering” of US led quantitative easing have compounded recent weak underlying macroeconomic data as current account deficits continue to widen and inflation creeps up.
We are underweight both markets and believe that relative valuations are less attractive in India and Indonesia with the combination of value and yield less compelling versus China. Therefore, we intend to maintain a broadly unchanged position in the near term.
We highlighted our cautious stance on Indonesia back in May 2013 and we continue to remain wary of the negative data flowing from Indonesia at this point. The rise in subsidised fuel prices could dent consumption and precipitate an upward inflationary environment. In addition, as we move towards the 2014 Presidential elections there is a danger that policy reform momentum could slow.
There are similar fundamental issues in India, where we remain underweight with only one holding, Cairn India, a company that benefits from the weakening currency. Following a raft of policy initiatives, the currency has continued to weaken and with an upcoming 2014 election, policy options may remain limited. Additional risk is presented by equity flows funding the current account deficit, which could turn more negative in an environment of rising interest rates and sustained weakness in terms of GDP growth.
Overall, as previously guided, we remain cautious at a macroeconomic level but maintain our bottom-up approach to identify names that display attractive valuations, strong balance sheets and sustainable yields.
Mike Kerley, manager of the Henderson Asian Dividend Income Unit Trust and the Henderson Horizon Asian Dividend Income Fund.
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