As the erratic US economy continues to act up, all eyes will be on Fed Chairman Ben Bernanke as he testifies before Congress on Thursday. If the Fed decides it needs to act later this month, it could either extend its current program of selling short-term securities to buy longer-dated ones, known as Operation Twist, or it could embark on a third round of quantitative easing (QE).
However, Adrian Mowat, chief Asian and emerging equity strategist, JPMorgan finds no reason to suggest that the Fed will take any action to stimulate the US economy. Similarly, on the euro zone’s woes, he says, “I don’t think the ECB is likely to act ahead of the meeting at the end of this month between the European leaders.”
On our domestic issues, Mowat says inflation is slowly coming off and pessimism is beginning to wane. From the BRIC (Brazil, Russia, China, India) nations, he says Russia, Brazil and China will continue to be somewhat troubled going into the second half. Whereas, he says, there is an argument for certain emerging markets like India to do well in the second half of this fiscal.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: Would you put it down to all the talk of liquidity easing or does it look mostly like a technical bounce back on markets? How much more would you give it in this current pullback?
A: The most important data point was probably the US Beige Book coming out just reminding people that the US economy is growing, that we are seeing growth in employment albeit relatively modest. When you look at the trading activity in Europe, indexes such as the DAX were coming off mid-day and then picked up as the US market opened. So it’s been much more about the US economic data than expectations of actions by the Fed or the ECB.
Q: In your assessment, where do you think the stimulus will come from? Will it be the Fed extending Operation Twist, will it be the ECB or in the worse case, do you think there will just be some lips in sympathy and not too much of action this time around?
A: There is no reason why the Fed needs to stimulate the US economy. The economy will probably expand to 2-2.5% this year. Yes, the non-farm payroll number was disappointing but it’s still an expansion. The situation is tricky for Mario Draghi as head of the ECB at the moment. What he needs and what Europe needs is for the politicians to come to some sort of agreement.
I don’t think the ECB is likely to act ahead of the meeting at the end of this month between the European leaders. What Europe needs to do is to agree how to get capital into the banking system particularly in Spain, agree on some deposit protection to mitigate the risk of a run on banks and this type of action is a political decision. It’s not a decision the ECB can take unilaterally.
Q: How does all this play out for the emerging market universe? There is talk of a flip in trade in the second half where perhaps EMs have a chance of outperforming versus traditionally strong markets like the US?
A: Yes, there is an argument for certain emerging markets to do well in the second half. I am still very conservative on the outlook for China’s growth and China’s property market will be a drag on China’s growth for quite a number of years and the government’s ability to stimulate that economy was massively overestimated at the beginning of the year. So I think China will disappoint, commodity prices will remain bleak and that will have an impact on places like Brazil and Russia.
In contrast, the commodity importing countries that have had inflation problems look as if they will be in a better macro economic environment. When we look at a place like India - big current account deficit, big oil and commodity import, hopefully the current account deficit will continue to narrow with the declining commodity prices. The fall in the rupee is equivalent to about a 100 bps of the repo rate, so that’s a stimulus as is the RBI’s actions already to date.
A lot of pessimism on Indian inflation is coming down. Our view is actually Indian inflation will be coming down. India looks well placed for this story. Maybe so does Turkey, the manufacturing sector in Mexico continues to look interesting, but Russia, Brazil and China will continue to be somewhat troubled going into second half. So I am not sure if it’s a broad EM rally but I think it will be much more country specific.