In an interview to CNBC-TV18, Geoff R Lewis, executive director, JPMorgan AMC says he is positive on the Indian market performance in 2013. Lewis believes the government is serious about ending the policy paralysis and the committee that will speedup infrastructure projects will help the economy.
“Also, macro-economy is over its worst and inflation may well have peaked. So, all in all we would take a fairly positive view of the prospects for the Indian stock market in 2013,” he adds.
On other Asian markets, Lewis says overtime, people will start becoming positive on China too. He says despite the Chinese government's actions to give the economy an impetus, anaylsts and markets were "simply impatient."
"There is always a lag between fiscal policy and an upturn in aggregate demand, but eventually we saw that coming through. We have been in the “soft landing” camp all along. So, we weren’t surprised to see the acceleration and on a sequential-basis, China actually seems to have bottomed in the first quarter. Things now are on a much sounder footing going into 2013. I think more people will be more relaxed about the outlook for the Chinese economy going forward," he opines.
Below is the edited transcript of Lewis’ interview to CNBC-TV18.
Q: What have you made of China in 2012 given that there were serious concerns about a considerable slowing down of growth in the first half of this year? There was some government action, fiscal stimulus, central bank action in China that helped alleviate those fears?
A: That’s right, at the start of 2012, many commentators particularly those outside China were calling for a “hard landing” and then, the government began to take some selective fiscal easing measures, but markets and analysts were simply impatient. They weren’t willing to give those measures enough time to work. There is always a lag between fiscal policy and an upturn in aggregate demand, but eventually we saw that coming through. We have been in the “soft landing” camp all along. So, we weren’t surprised to see the acceleration and on a sequential-basis, China actually seems to have bottomed in the first quarter. Things now are on a much sounder footing going into 2013. I think more people will be more relaxed about the outlook for the Chinese economy going forward.
Q: So what does that mean for your outlook for 2013, based on the fact that we have just seen a change in the leadership in China? There is still a certain amount of structural reworking to do for the Chinese economy and then there are of course concerns on the banking Non-Performing Assets (NPA) front as well. So, your assessment for what 2013 holds?
A: I think 2013 is going to be a year of 8-8.5 percent Gross Domestic Product (GDP) growth. We will see some more reforms, but the big changes maybe delayed until next October and the third plenum session. The Chinese government will want to keep things fairly steady and won’t want to see the economy accelerate back to 9-10 percent double digit growth rates. So, it will be a question of probably incremental reforms initially, but they will be definitely be moving in a direction of wanting to accelerate reforms to their economy and start really rebalancing more away from fixed investment demands towards consumer spending. However, that will be a long-term objective obviously.
Q: Should we be anticipating some big changes in October?
A: That’s traditionally been the time when new administrations have unveiled major measures. I think we will see something on “Hukou” reform that would be a very popular measure obviously. There are some 200 million migrant workers who do not have urban residency rights or full access to social safety net, pensions etc. So, that will be very welcomed. Also, we need to see more on state-owned enterprise reform, opening up more sectors to the private sector.
Q: The slowing of China, atleast in the middle of this year, did dampen commodity prices considerably across the world. Now, some of that seems to have been reversed, also thanks to central bank action that we saw take place in the West. What do you make the impact of 8.5 percent growth as you seem to be forecasting in China will have on the commodity markets?
A: Clearly, China’s growth has a big impact not just on physical commodity demand, but on sentiment in the commodity market. We have seen some downward adjustment in Chinese inventories of commodities like iron ore. I think that means that we are looking at a more favourable outlook for the commodities, although, nothing like booming commodity prices in 2013 because we see a fairly moderate growth trajectory for the Chinese economy.
Q: We have seen a change of guard in Japan as well. With the arrival of Prime Minister Shinzo Abe, it seems the focus will be both on fiscal stimulus as well as substantial monetary easing. We have seen that impact the Yen these last few weeks. What is your outlook for Japan in 2013?
A: Abe has put a lot of pressure on the Bank of Japan immediately. We saw the Bank of Japan respond with an increase in the asset purchase programme last week. I think probably the governor, Masaaki Shirakawa will move to a firmer price target to end deflation of 2-3 percent in January. We will also see more fiscal stimulus. I think investors should now be atleast neutral on the Japanese market. It has already rallied 20 percent over the last month. Its price-earnings (PE) ratios have de-rated over the past decade but are now broadly in-line with those of other developed markets. So, investors are certainly taking a fresh look at Japan, however the longer term structural problems are still quite formidable.
Q: What’s your outlook on the Yen, because it has been an interesting play for currencies this year, hasn’t it? Given the kind of surprisingly slight strength or the strength that we have seen in the Euro?
A: We have seen range-trading broadly between the major currencies in 2012. That is going to be driven as much as anything by the relative aggressiveness of central banks in pursuing quantitative easing (QE). There, I think the Fed probably has the advantage, but the US economy is also going to be doing better. So, on balance, I am not expecting major moves in the key currencies. It is a fairly low conviction view at the moment.
Q: Does that hold for the Yen as well, especially if we continue to see further action by the Bank of Japan?
A: I think it is going to depend on whether Abe can get his wish-list fulfilled and whether the Bank of Japan will ease as aggressively as the Fed. We have already seen quite a big movement in the Yen and certainly that will help the Japanese economy if that is sustained.
Q: Moving to a slightly more macroscopic view of Asia including India as well as other emerging economies in the region. Your view on emerging market (EM) growth and the impact on global growth given that Europe is probably going to continue to contract next year and the jury is still out on what will happen in the US given this fiscal cliff issue?
A: We can expect a flat Europe. On the US, we think there will be a weakness in the first quarter because of the increase in the fiscal drag. The fiscal cliff issues will not be fully resolved by year-end and that now seems quite clear, but we also believe that the US recovery will broaden out later in the year. US private sector is capable of growing at 3-3.5 percent. Also with China picking up, it is not such a bad outlook for the rest of Asia. Although, we are unlikely to see any V-shaped recovery, it is more going to be shape like a slightly sauce dish. So, it is going to be fairly flat for a while and will then pick up towards the end of 2013.
Q: What are the downside challenges you see to this forecast of yours? The Iranian and Israeli elections are also expected next year.
A: One of the other risks could be that the housing sectors in some of the core countries in the Euro-zone are still extended. We could see a weakness there spreading to the core economies and that is one risk possible. Greece could always come back to haunt us, although, Greek exit now looks to be very much a tail risk.
Otherwise, in the US the amount of fiscal consolidation that the economy can withstand in 2013 is not actually known with any precision. So, it could be that the US economy turns out weaker than in our central forecast where we would expect something close to 2 percent for the calendar year overall.
Q: What is your view on India and how it fared so far this year? What is your outlook for 2013?
A: For India we believe that the government is serious about ending the policy paralysis and that the new committee chaired by the prime minister, which will try and speed up infrastructure projects, is a very good idea. Also the macro-economy is over its worst and inflation may well have peaked. So, all in all, we would take a fairly positive view of the prospects for the Indian stock market in 2013.
Q: What does this add upto in terms of fund flow into emerging markets, given the continued easing bias of central banks with its Outright Monetary Transactions (OMT) and the Bank of Japan with its Abe pressure?
A: I think with tail risks having been reduced and gradual improvement in the outlook for the global economy, it would not be a surprise to see an increase in the funds moving into risk assets including emerging market equities. Although, it would be fairly gradual, I don’t see any deluge of foreign money coming into the Asian markets, which would cause problems for monetary control in some countries.