Andrew Economos, JPMorgan AMC does not foresee more fund outflows from emerging markets (EMs) and has become a bit more optimistic on India now. He believes the Reserve Bank of India (RBI) has shown some leadership in controlling the rupee volatility after policy paralysis by the government.
He told CNBC-TV18 that US may perform better than most other economies and in terms of real economic growth going ahead. “We should start to see money flow in terms of the capital account into the EMs as well as money flow from financial flows and expect that to happen sometime in 2014,” he added.
Below is the verbatim transcript of Andrew Economos's interview on CNBC-TV18
Q: What is your view on Bernanke’s testimony on Wednesday? The asset markets have reacted mixed. What will be the key takeaway for this quarter? Will some funds continue to move away from emerging markets (EM)?
A: Bernanke is walking that fine line between satisfying both the doves and the hawks and realising that in this bully pulpit, as head of the Fed he has tremendous clout over with government policy as well as what financial markets will do.
He is the only leadership in the US at this point and globally in terms of the other central banks. As a result, he has to be extremely careful of what he says and this mix message was a direct result of that. He also understands that you still have a fairly weak US economy and anything holding up the US consumer is the fact that stock market prices are pretty high.
Also, you have recovery in the housing market which means increased confidence and if you have those things slowed down then the consumer slows down. Why is that relevant to EMs? You are not going to see fund flows.
You are not going to see economic recoveries really ignite in the EMs unless you can get the US economy going. So, it does have an impact both in terms of real economic growth as well as financial fund flows and capital market flows to the EMs.
We expect the US to be better than most and in terms of real economic growth, we should start to see money flow in terms of the capital account into the EMs as well as money flow from financial flows, from portfolio flows into the EMs. We expect that to happen later in the fourth quarter or sometime in the 2014.
Q: There are some expectations of money flowing into the EMs, but while we do see this to and fro of Ben Bernanke, he has perfectly mastered the art of communicating both a hawkish and a dovish statement in one go. How do you allocate funds? If you believe that funds will come back into EMs then what would your pecking order be within the EM space itself and where does India feature on that list?
A: Bernanke is caught between a rock and a hard place. He has a weaker economy than he anticipates, but at the same time things are getting better and he has to maintain the status quo and not make it too hot, nor too cold so that we can get economic growth reignited in the US.
I am not an apologist for the Fed, but I understand fully why he is taking this activity. You have to realise that the messages from the markets are not mixed. You have relatively slow, modest, but no inflationary growth. You got ample liquidity and low interest rates still. That means money will still go into the risk assets. As the US has been the predominant recipient of equity flows.
We are starting to see some of that money go into the other developed markets (DM) namely catching Europe opportunistically, the natural progression will be inched back into EMs as the US becomes the engine of growth supplanting China as China enters this reorganisational restructuring period which is necessary.
Q: How would you look at the EM basket performing? I don't know whether you look at India specifically, but many of these countries including India and China are actually sliding in their economic performance, even the trough has not been reached when you look at some of the recent data. Do you fear that there could be fund outflows for now before the inflows begin?
A: I do not feel there is any fund outflows. Much of the damage has already been done to the EMs. We have seen relative underperformance vis-à-vis the DMs for quite a while and we have seen within China and India, those underperform significantly.
India in particular is interesting, it is time to start taking a look at it quite seriously and as a result of it we have become a bit more optimistic and are looking for opportunities with India. However, RBI is showing a bit of leadership. They have opted to move in terms of strengthening the rupee at the expense of the economy.
We would like to see interest rates come down rather than go up. We will wait to see like everybody else the July 30th happenings, but more importantly we think that the RBI is exhibiting some leadership. But let us put the policy blame squarely on the shoulders of the policy paralysis that has gripped the Indian government.
If you had a government intent on liberalisation and privatisation as they intended to do from the beginning, the RBI would not be caught in this quandary of becoming the only leader of the economy.
Q: How are you approaching the entire currency basket then? The rupee is still sitting close to record lows and the dollar index refuses to budge from highs of around 83 or so. What is the next trajectory for the currency basket?
A: If you look at a quick short-term indicator of risk appetite, it has to be the dollar index (DXY). If the dollar continues to strengthen that is not good for EMs in general. The RBI chose to draw a line in the sand with the rupee and put 60 underneath it to the dollar and that seems to be the target where they will continue to intervene in terms of policy and other adjustments that they have to.
We have seen the worst of the rupee. Right now the government is going to be focused on trying to get economic growth up and the RBI will continue to do their part, maybe even cut rates or hold rates on July 30th, but I do not think we have a fear of them raising rates, unless they have turned from Keynesians to Austrians overnight and I do not think that has happened.