Geoff Lewis, ED, JP Morgan AMC is surprised by US consumer spending holding up and adds that there may be a short-term correction in the US market. Lewis foresees a gradual recovery in the global economy expects markets to offer better returns in 2013 over 2012.
"I am still optimistic about India even though it has been one of the poorest performers out of the top 50 stock markets year to date. It is an interesting opportunity in terms of valuations and being at the bottom of the list of the most expensive Asian equity markets, provides a good entry point for investors," he told CNBC-TV18.
Below is the edited transcript of the analysis on CNBC-TV18
Q: The Dow has touched highs three times in a row. Is the risk-on sentiment still robust?
A: There is a possibility for a short-term correction. At any time, the markets have looked a little overstretched but in terms of positives, yes I would endorse the view that it is a positive and will encourage investors. The markets and economies are doing better, the job market is improving and of course, the wealth effect is turning out to be quite important.
It has been a bit surprising how well US consumer spending has held up especially with the tax increases. One reason for that is that the financial wealth lost in the crisis has been recovered. The stock-markets in PE terms look much cheaper than in 2007 and that suggests that there is scope for continued improvement in share-prices.
Q: Do you see the risk-on continuing at least for the first half of the year?
A: I don’t think it is likely to continue in a linear pattern. There will be some short-term corrections but with a lot of investors waiting to buy on dips, any correction will be fairly moderate and mild. This of course is conditional on gradual improvements in the global economy and the US withstanding the sequester and the tax increases in Q1.
The US economy has started to broaden. The industrial sector is performing very well at the moment and we will see some considerable strength in the final quarter of this year. So in this scenario, investors will be able to receive reasonable stock-market returns even if there is a degree of volatility. I don’t think we have seen the end of risk on-risk off but I don’t think it will be as severe a factor as it was in 2012.
Q: So in this risk-on environment, do you expect gains to be led by US markets as seen over the last three months or so or do you expect high beta markets like emerging markets to perform better?
A: Investors are surprised that EMs haven’t performed better. Certainly, we are positive on the US stock market and remain so, but we also think that EMs will do better in relative terms during the course of 2013. They were hurt by a margin squeeze, cyclical problems with costs and profits. There needs to be evidence that earnings in Asia and other EM regions are stabilising and likely to improve. There are very tentative signs that this is happening in some EMs, but by no means in a majority of the markets at the moment.
Q: How are flows?
A: Flows don’t proceed in a linear pattern. There was a lot of talk in the media about a great rotation. We were always rather skeptical but we did believe that investors will move out of cash into equity markets and there are signs indicating that trend. It is not surprising that there has been a bit of pause over the last couple of weeks, but I don’t think that is the end of the story.
Q: The street was a bit concerned about China in terms of the growth. Where do you stand on China?
A: There were concerns on China’s hard landing through out 2012 which proves to be unfounded because the selective easing which the authorities undertook from April onwards did succeed in causing a gradual improvement in sequential growth of the economy. A lot of that appears to have plateaued as the year end approaches. So I don’t think there is strong upward momentum, but I don’t think there is strong downward momentum either. It is a relatively stable macro-economic outlook for China and that should be good for investors.
Q: What is your take on India?
A: I am still optimistic about India even though it has been one of the poorest performers out of the top 50 stock markets year to date. It is an interesting opportunity in terms of valuations and being at the bottom of the list of the most expensive Asian equity markets, provides a good entry point for investors. We believe that the worst of India's macro-economic problems are over and that this government means what it says about introducing reforms and anti-policy paralysis and that has made us take overweight positions in India in our regional Asia equity portfolios.
In terms of sectors, we prefer to follow a bottom-up stock-picking approach. In the financial sector, we are marginally overweight the banks but not PSU banks. We are aggressively overweight on some of the private sector banks and other financial institutions. We like cement, consumer discretionary and are underweight on some of the more expensive sectors like utilities and telecom.