Geoff Lewis, JPMorgan AMC feels that emerging markets are cheap now. He says the region is still the second most preferred investment destination for foreign institutional investors.
He is overweight India in his regional equity and global portfolios. He believes that it is the best time to enter Indian market. However, he feels that investors will have to be patient as there is a lack of an immediate catalyst for the market to move up.
Besides India, he sees, Japan taking centre stage shortly. According to Lewis, a lot of people are going to be overweight Japan, which might keep the emerging markets out of the limelight for a while.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: Would you say that the worst for Indian market is over and structurally given the fact that crude prices have fallen so much, the currency had also strengthened a bit is it still time to buy a market like India?
A: We would say it is a great entry point. We are still overweight India in our regional equity portfolios and also in our global portfolios. Investors would have to be patience though, because I am not sure there is an immediate catalyst. When economies have been through bad patch like India has, it takes time for them to trough. It takes time for them to start to pull out.
We are hopeful that the worst is priced with regards to the real economy. The latest data has been a little bit hopeful. With regard to the currency, the rupee people probably focus too much on the current account. Yes, we are going to have an improvement now. Yes, lower prices are good, particularly for India, which is very dependent on imported energy. However, gold has been a large part of the reason why the Current Account Deficit (CAD) ballooned in the last couple of quarters of 2012. That should now reverse.
So that will provide some relief. At the same time it had got to very high extended levels, so progress probably will not be in a straight-line, but it will certainly take some of the pressure off. At the end of the day we still need to attract significant capital inflows. I do not think that will be a problem myself. I would expect the rupee to trade largely in a broad sideways range, but with some considerable short-term volatility in the months ahead.
Q: We did see the global risk-off in commodities kind of finding a floor. Do you think this is just routine short covering? Are we going to see more onslaughts on commodities as an asset class?
A: It is always possible in these risk-on risk-off markets that you could see a further move. I think it is pretty largely discounted. We are down 10 or 15 percent and it has been a rational response to the realization that China is on a recovering growth path. However, it is not going to recover to really strong growth. So, the rest of the world is going to be chugging along at trend or slightly below trend in case of Europe. This is not a global environment, which anybody would expect should be driving strong commodity price growth. We have had some quite significant corrections in commodity prices. For commodity prices now probably the best is over in terms of the trend in their real price appreciation.
However, they are probably quite well supported by an economy that is still going to have 2 percent growth in the US, 8 percent growth in China, but it still deserves a place in investors’ portfolios for its diversification benefits. It is one of the less correlated assets. I would not say it is likely to collapse, but I do not think it is going to climb much either.
Q: The trade for better part of last year was to short emerging markets and buy developed markets. We have heard a couple of voices over the last week that maybe that trade may get reversed as early as next month. We may already have seen the signs of that trade reversing. Where would you stand on a trade like that? Do you think it is time now for emerging markets to maybe correct the underperformance that they have seen over last six months or so?
A: In terms of the risk reward ratio that is probably where you should put your money even if it is hard to see an immediate catalyst, which would trigger a strong move in that direction. The point is the BRIC markets are trading close towards 40 percent discount on 12 month forward PE ratio basis to the S&P 500. So, the underperformance that we have seen has brought back tremendous valuation there. Having said that, Japan now is a major focus for investors, there will be money moving into Japan.
A lot of people are going overweight there, that might keep the emerging markets out of the limelight for a while. It is hard to see what the catalyst would be given that the China data has been a bit disappointing given that earnings are still seeing more downgrades than upgrades. In risk reward ratio terms for the patient investors who believe that the risk-on markets will continue in the second half of the year this is a good time to be making that switch that you have just mentioned.
Again they would have to be patient. Do not expect to be rewarded in the next couple of weeks. You might have to wait for at least a couple of months before the new trend becomes apparent, but I certainly think emerging markets are cheap. They are still the second most preferred equity region in the surveys that I have seen by institutional investors.
Q: What is with the German economy and the fall in the DAX that we have seen, the systematic underperformance? What are the ramifications basically for other markets? Will it mean that there will be more leeway for more euro printing, because the biggest economy is facing a growth pang? Will that mean that dollar faced by a weak euro and a weak Yen will actually strengthen? What does that mean for all the asset markets?
A: That is a very good question. I would think it is a question for the policymakers in Germany. What the markets are telling us there by the DAX’s underperformance is that they are fearful that the Yen’s depreciation is going to see German exporters losing some market share at the margin in some of the areas where they compete head to head with their Japanese counterparts in like engineering and autos. If you look at the contributions of euro zone growth quarter by quarter, it has been driven by net exports.
So, there must be tremendous caution and worry if the euro strengthens because the European Central Bank (ECB), which is now the odd one out because it has a contracting balance sheet, it has declined by some 10-12 percent over the last couple of months. Then this is exactly not what the euro zone needs. The euro zone needs more growth. If you look at the composition of demand within euro zone then I am afraid the German consumer has been missing in action.
There has been no positive boost from the euro zone’s largest core economy that would help the smaller periphery economies, which are in deep distress. So, it is nothing encouraging situation I am afraid.