In an interview with Mr Adrian Mowat MD & chief EM Strategist of JP Morgan talks about emerging and developed markets.
Q - What is your view there, has that trade been played out now?
A - Mr Adrian Mowat answered no, definitely has not been played out. If we just go back through the history we moved late 2010 overweight developed markets and underweight emerging markets and that was driven by the fact that developed market economic data was exceeding expectations and in an emerging market we were concerned about inflation and monetary tightening. The situation has changed quite dramatically where you begun to see meaningful disappointments with developed market economic data with most recent example being US GDP. Our economic surprise index which had been very positive since QE2 was announced in October last year turned negative a month ago. So developed markets no longer have the support of strong economic data whereas in emerging markets I think investors have got around the fact that they are dealing with inflation. In quite a few countries we look out we think that the inflation dynamics are not quite as bad as the market expects. So there is a fundamental reason now to be long emerging and short developed markets. I would add a little bit more on these GDP downgrades this is not about the Japanese earthquake it is something very simple that the price of food, fuel, manufactured products is going up and that is hitting the developed world consumers who have only modest income growth at this point in time. If you look at the inflation indicators that the Fed likes to use as the personal consumption expenditure deflator that is rising at the same level as US nominal household income. There is no growth in discretionary income in the US and this is why GDP is being revised down.
Q - While you are long on EMs what is the view on India right now keeping in view the underperformance in 1 Q and then there has been this big rally but the range continues on the price to earnings multiple between about 13-14 times on the lower side to about 16-17 times maximum on the higher side? Do you think we can break out of that?
A - He answered yes I think there are couple of things need to put in context. I am very concerned that we could see a correction in developed market equities. As I was talking about earlier the fundamental support has now gone and more people are relying on this momentum reminds me little bit of the cartoon character that has run off the cliff but they have not look down yet. And if we were to see a correction in developed market equities then emerging market equities would come lower. If I have to be a 100% investor in emerging market equities at this point in time I am overweight India. I think India has a number of macro drivers. We are beginning to see normalization in the yield curve. If we look at the wholesale price index for food that has been trending down this is the index rather than the Euro the change and finally India had a political system dealing with all the corruptions, scandals. They have managed to pass a few acts at parliament. We are seeing some projects being approved. The absolute level is still very poor but the change is in the right direction. Finally as you highlighted the Indian market does have some relative momentum which is in its favor. I have to say when I talk to clients on India they seem to spend a lot of their time telling me about all the problems in India that is often a good sign when you get that type of reverse broking from the investor base. It usually means that they priced in much of the bad news.
Q - What is your Sensex or the Nifty target for next year?
A - Mr Adrian Mowat answered that is always a great question as now people want to ask the same. I think India will outperform emerging markets. Now whether emerging markets do well over the next quarter is really going to be a function about how resilient developed markets are. We could repeat what happened in 2010 in the 2 Q which was a meaningful correction in developed market equities and emerging markets equities because the economic data began to roll over. I think if that happens it is unlikely that India will do well while that correction is going on. What I would say about India is the current valuation levels I am comfortable with I think it is perfectly reasonable to get 15% earnings growth out of the Indian market; and for an international investor I do expect the Indian rupee to appreciate versus the dollar which is in line with what we are seeing with other emerging market currencies. So a return of 15% to 20% for dollar based investors looks reasonable to us for India.
Q - How global central bankers currently are tightening it started with China then Fed is also speaking the inflation language ECB also has moved what are your thoughts on global liquidity?
A - Mr Mowat answered that interest rates are rising and being normalized one should treat as a positive as this gives confidence in these emerging economies to normalize monetary policy. There is plenty of cash out there to buy risk assets if investors to deem it to be the right risk reward profile. So I am not particularly concerned about these moves and interest rates and how they will go to affect the availability of cash to buy equities. Remember that there is an awful lot of money still sitting in bank deposits earning nothing or very low rates of interest and a lot of money is sitting in the bond markets. The outlook for the bond market looks very challenging as interest rates move higher and bonds give you a capital loss. So I think that is where investors are going to be focusing on the move in interest rates and ironically that might push them into equities and out of bonds.
Q - IT has often been favored by lot of foreign funds when they are looking at India and that is why the foreign institutional holding in these stocks is pretty high. What is the call from an FY 2012 perspective on IT?
A - He answered that I am bearish on technology in emerging market context. I am just going back to the initial discussions on what happening with global growth dynamics but the bearishness are really on tech hardware so names in Korea and Taiwan whereas if you look at the balance sheet and the cash flows of US corporations they still remain quite healthy. US corporate apex in 2009 was less than depreciation and we are seeing normalization in apex which should be broadly favorable for Indian IT sector. So it is a better story than tech hardware but I am not sure how well it is going to do as people price in slightly lower growth in the US
(Sourced from Economic times)
