Jan 08, 2013 01:55 PM IST | Source: CNBC-TV18

India may lag global peers until budget: JPMorgan

Of late the US fiscal cliff has been a cause of concern globally and Adrian Mowat, Chief Asian and Emerging Market Equity Strategist, believes markets around the world are likely to be volatile due to the debt ceiling negotiations.

Of late the US fiscal cliff has been a cause of concern globally and Adrian Mowat, Chief Asian and Emerging Market Equity Strategist, JP Morgan, believes markets around the world are likely to be volatile due to the debt ceiling negotiations. As a result, he advises clients to be cautious ahead of the negotiations in the US. He suggests investors to buy into a possible correction.

Mowat further added that there were huge inflows into emerging market fixed income in 2012. According to him, equities are likely to find support from funds switching out of fixed income. Moreover, emerging market equities have an opportunity to fare better in 2013 when compared to the last calendar year. Global equities are also likely to outperform in the second half of the calendar year 2013, opined Mowat.

However, he is not very optimistic about India replicating its 2012 returns in 2013. He feels gains in India are going to depend on government policy action. He is of the view that the Indian market may underperform global markets going into the budget.

Below is the edited transcript of Adrian Mowat's interview with CNBC-TV18

Q: Between now and the end of February, are you expecting to see some volatility and turbulence in global markets as they resolve issues of the debt ceiling etc?

A: Yes, I think investors should become a bit more cautious tactically. In the long-term we are very bullish on markets but, as we look into February, we need to deal with the debt ceiling, we need to deal with the fiscal cliff as we did not have a fiscal cliff deal. We decided to postpone the decision until February.

It is important to understand the context of this. There does not seem to be any unity within the Republican Party. So it is going to be difficult for the White House to find out who to negotiate with in order to come through with a deal.

If you then look at the economic data in February, that might show you some weakness. When you receive your pay-cheques in the United States at the end of January, there will be less dollars in those pay-cheques because of the increase in the payroll tax. I do expect the volatility to pick up. My advice to clients would be to be a little more cautious in the short-term.

Q: Are you expecting a significant pullback in markets and if it were to come about over the next six to eight weeks, would you advice your clients to buy into that weakness again?

A: I would definitely advice them to buy into the weakness. Our base case is that we would see markets coming off but do not see a significant pullback, nothing like we saw maybe in May 2012. However, it is important to look at the current consensus view, which is that economies are okay,  they are generally improving, European risk is low, emerging markets (EMs) economies are also getting better. When that is the consensus, you are open to a little more disappointment. The focus of our concern with the sale off though is very much the United States.

Q: Do you expect a 5 to 10 percent correction and would that be equal for all markets because the last few weeks of December did see weakness for the US markets but that did not necessarily translate into weakness for Asia?

A: I think it would be for all markets rather than just for the US. So the US did not fall but, it did not outperform the other markets that were rallying. But I think if the US is correcting and you tend to see the correlation rise with other markets.

Q: To talk about flows for a little bit, what kind of trajectory do you think flows will take for at least the early couple of months in this year because that has been phenomenal, especially for markets like India and most recently China as well?

A: What we saw last year was huge inflows into fixed income, particularly in the emerging world and relatively good inflows into emerging market equities. As you highlight, those were somewhat back-loaded towards the latter part of 2012.

We do believe that the big medium-term call is a swing of money out of fixed income into equities and that is what makes this bullish equities medium-term to long-term, even though we may have a more short-term cautious view. I would see India benefitting from that as I would see other emerging markets benefitting from that.


Q: The CBOE-VIX has been grinding at historically low levels for many months now. Is there a risk that global investors have become a bit too complacent because the European risk did not blow up in 2012?

A: I think there is a degree of complacency out there. I have to say that the VIX indicator has not been particularly useful in the last couple of years. We believe that there are less buyers of insurance such as hedge funds and perhaps that is why the bid has been relatively weak. It is important to understand that there is a constant supply of volume through various structured products.

I am not sure if it is a great signal that people are overly complacent, maybe we should look at this the other way. If we identify some fundamental risks, some technical risks to the market such as the US debt ceiling and the cost of insurance is low, perhaps people should go out and buy some of that insurance.

Q: How do you think 2013 will turnout eventually with bouts of volatility, like the one that you are predicting right now, do you think it may still be a year that is okay for equities at the end of it?

A: I think 2013 is going to be a better year than 2012 for emerging market equities and thus we are going to see investors moving out of fixed income into equities. As they realize that the global economy is in fact growing, the emerging market economy is growing with a relatively controlled inflation but the way the optical look is, the US economy will be weak in Q1 and then will begin to build-up steam.

As people look into 2014, optimism will be building. I think the returns could be more focused in the second half of this year but, they will be in our view, very good returns out of equities.

Q: It will be better for the Indian equity market as well, specifically because a lot of people believe last year’s performance will be difficult to replicate this year. We may be somewhere in the middle of the performance trajectory, not the top two or three as we were in 2012?

A: I think that is a good point. India had a very poor 2011 and recovered part of those gains in 2012. I do not think you get that type of recovery returns. But, we expect those sort of sequential returns out of India to remain healthy.

We see this economy continuing to build steam, there is momentum in the reform process, although we have to be conscious that the market has expectations about what is passed during the Budget session of parliament. I see India generating good returns with probably not the type of recovery type returns that we enjoyed in 2012.

Q: How deep then would you say is downside for a market like India because that February period is sitting at odds with what has happened globally, do you think it will get limited to a 5 to 10 percent correction or do you think it could get worse before the market starts to perform in the second half as you suggest?

A: I think that this will be a function of policy in India. If there is a failure to continue the reform momentum as we go through February, the Indian market might underperform global markets. So the correction proves to be more severe.

If there is progress with policy then I could see India outperforming. I think we need to look at these domestic factors in order to determine the beta.

Q: You stay with your hypothesis though that what we started in 2012 could be the beginning of a multi-year uptrend in equities and we will not see alternate good years and bad years like we have seen in 2010-2011?

A: I think we will have a couple of sequentially good years but, it is important to understand that we have extraordinary monetary policy out there. Eventually, this monetary policy will need to be unwound, it will need to exit from quantitative easing and I would imagine this will generate volatility across assets. My view is that you end up with a compression of the bull market into a couple of years rather than being a 6 to 7 year cycle.

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