Financial Daily from THE HINDU group of publications
Thursday, Feb 23, 2006
Financial Daily from THE HINDU group of publications Thursday, Feb 23, 2006 |
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Markets
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Interview Manage risks with large-cap exposure: JP Morgan
AS per JP Morgan, the valuations in the Indian market are really a matter of concern. Therefore, its strategist for Asia, Mr Adrian Mowat advises people to focus better on risk management by having large liquid blue chip counters. Calling Indian story a `Weight Of Money' Story, he maintains that the flow of FII money will continue in the Indian markets, but he doesn't rule out what he calls, "some hiccups along the road." Excerpts from CNBC-TV18's exclusive interview with Mr Adrian Mowat: Do you think the PE is all right as most people seem to think that it is more than just all right at the moment? If one is sitting there as a local Indian saver, the choices one has are more restricted than they are for an international investor. At the moment, the Indian yield curve is offering a relatively modest yield compared to the level of the economic growth that we are seeing in India. You have got an economy that is bouncing along with a growth rate of 7- 8 per cent and the inflation rate of only 4- 5 per cent. So the nominal GDP number is near12 per cent, whereas the long end of the bond market in India is yielding around 7.5 per cent. When one looks at the RBI household survey, one finds that equity exposure is quite modest. The exposure within a household to property has been rising more recently. But that is even modest compared to other Asian economies. That is what keeping the valuation where they are, even though India is, perhaps, more expensive than Russia, Brazil and China. I think that is acceptable because the locals keep the valuations where they are. What about the foreign investors then? How do you see the FII flows panning out for the rest of the 06? I think flows in the emerging markets will remain very strong. I think this will happen throughout 2006. However, we are going to see some hiccups along the road. People's attitude toward risk changes on a day-to-day basis. When that occurs one does see corrections in the emerging markets. I would expect those corrections more as a buying opportunities rather than a profound change in the direction. I think volatility will be higher in 2006 than it was in 2005. There are some local issues that will drive that volatility. How volatile do you expect it to get because you are expecting a year-end target of 11,000? We have seen intra-month moves of 10 per cent in the emerging markets over the last 12 months. I would think that is quite possible within India and other emerging markets. I think the main driver for that could actually be the US bond yields moving higher, which then temporarily reduces risk appetite and you see a correction occurring in the emerging markets. So you could have volatility that is equivalent to the total year of return. Your top picks in India among the stocks, which have run up today are Bajaj Auto, BHEL, Larsen and Toubro? Do you find valuations still reasonable or growth so attractive that you think larger investors will gravitate automatically to such kind of stories? The valuations as we highlighted in the report are a cause of concern. What we are highlighting is that this is `a weight of money' story and you are better off managing some of the risk that is inherent in such a story by having large liquid blue-chip counters. One should be highly selective in the small and mid-caps.
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