The global economy is witnessing an extension of easy money policies and rise in investors’ risk appetite a bit. Bloomberg TV India spoke to JP Morgan’s chief Asian and emerging market equity strategist Adrian Mowat, to get his perception of emerging markets, specifically India.
In global markets, we are again seeing a shift towards risk on trade. Do you feel it is because markets firmly believe a Fed rate hike is out of the picture, at least for now?
I would probably describe it more, as we had a very significant short covering. If you look at the short trading volume in Hong Kong, it has come down. If you look at short position in Mexican peso, it has come down. As of now we are seeing very little evidence that clients are putting on long risks. The Fed moves, I suppose, are helpful but remember, the Fed’s action also generated uncertainty.
Now you are getting multiple numbers of different forecasts about when the Fed may move. I am not entirely sure if that it is constructive. Obviously, overnight, we have seen some helpful comments coming out of the ECB and there is speculation on a little bit more of Bank of Japan quantitative easing (QE).
Perhaps the deterioration has stopped to some extent and some of the leading indicators are looking better, such as credit growth, government spending and property markets still looking alright. We have in India, the central bank giving us a nice interest rate cut and some of the fears around EM forex have also begun to diminish.
In that kind of a backdrop, what do you make out of the way the commentary really played out on Thursday from Mario Draghi talking about the fact that ECB was still very much looking at a stimulus move when needed? Did you go through something deeper when we talk about that commentary?
I think the ECB has been very helpful in encouraging the European economy as well as ensuring the financial system is liquid and functioning, and they are doing a good job with that.
But at the moment the inflation rates in Europe remain very low, and I think it is appropriate that the ECB continues to support through its QE operations.
I also think the ECB has probably been one of the most constructive central banks in understanding the right things to say to provide the markets and the broader economy with comfort.
In terms of fund flows and valuation, where do you feel the attention is shifting in the current environment?
Let me answer this question in different ways. When I talk to global accounts they are almost record low positions from where they were in 1999, in looking at emerging markets. So they are thinking about emerging markets which are offering value. But at the moment global funds are quite reluctant to pull the trigger. Now, if they do pull the trigger, I think the value is in places like China and also in Korea and Taiwan. There is also value in some of the currencies that have overshot on the downside, like the Indonesian rupiah.
We saw the South African rand and Turkish lira rallying on ECB news. So I think that is where the value is. I am sure your next question will be — is there a value in India? There is isn’t relative value in India but I think people are very comfortable with the (India growth) story.
But our people are actually willing to put their money in shares. Relatively speaking, in the context of the risk averse and risk-off scenario, are we in the middle?
As I have said already, we have seen short covering. If you look at the mutual fund flow data, you have gone from very large redemption in the last week, it has basically been flat. So we are not seeing people putting more money in (Indian market).
We were talking about the way the global trends have been panning out and how that could trickle in for a couple of markets. Let us be more India specific. What has been your take on this current earning season?
It is probably a little bit too early to focus on some key trends. I think there have been some stock specific issues in technology, the bank numbers are probably coming in a bit ahead of people’s expectations. But it is a little bit early to do a thorough analysis.
Overall we haven’t really got any cheer from earnings. What will be the next triggers that you will be watching out for when it comes to Indian markets?
It is going to be the central bank. We have inflation giving the central bank the opportunity to continue to cut the nominal policy rates. So I think that is going to be the main macro focus for the markets.
Any expectations for further RBI rate cuts after the surprise of 50 bps cut in September?
We think there is room for further cuts. That is what we are focusing on rather than getting too hung up on the actual numbers. You have got two countries out of the 23 emerging markets I look at, where nominal rates requires bit of above inflation rate — that is India and Indonesia. India is at the start of an easing cycle and that will be supportive for the market.
Out of those 23 that you are tracking, how does India really stack up right now?
We are overweight on India but that is in the context of being overweight China, Korea, Taiwan and also Mexico as the key big markets than underweight in markets such as Russia and Brazil, where we still have recession next year. Now India was quite relatively resilient in the third quarter sell-off.
I think probably we can get a more of a bounce or recovery in China in near term and possibly also in Korea and Taiwan. But still the long-term story is India would rank top amongst all the major emerging markets.
In terms of sector allocation as well and given the kind of cues that you are looking forward to, what would be your new radar? Where would you be overweight?
There isn’t any major change in our sector recommendation apart from one. We did have an overweight in Indian IT — we have cut that to neutral. We continue to like Indian financials, we like building materials, select consumer discretionary names. So that is what we are focusing on in India from the prospective of emerging markets.
Just to understand why you have reduced the rating on Indian IT. Was there something in the earnings that you probably didn’t like or is it the valuation discomfort?
Partly it was earnings and partly we think that the theme of EM forex weakness is going to reduce as a theme and obviously clients will look at key export sectors such as Indian IT and have a preference for being in those where you are seeing notable EM forex weakness.
I think there is less of a drive to buy exports earners in EMs as we begin to see a little bit of recovery in confidence.
On the commodity side, what is your outlook? Do you see a bit of a revival coming in or do you still feel the story is pretty dead for now?
I still think we are in a bear market for commodities fundamentally. And as the Chinese economy continues to rebalance it is quite possible that China’s demand for commodities move in to a secular decline.
We have over-capacity in many of the commodity areas and we also have great scope for reducing the variable cost of production. So our bias is for weaker commodity prices.
I think there have been some opportunities though in commodity stocks which were a little bit oversold, and so you had a little bit of a rally and probably it is still there in the bear market.
What has been foreign investors’ perception on reforms?
If we look at it practically, yes we would like the GST Bill passed as that will move India to have a proper common market. The Land Acquisition Act will be useful on the ground in facilitating infrastructure. But really investors want the bureaucracy to be efficient and decisions made.