Adrian Mowat of JPMorgan expects the US markets to drift down as they await the presidential election outcome, adding a surprise Mitt Romney win may lead to a rally. US stocks ended lower for a second day on Wednesday, as investors soured on another round of underwhelming corporate results and the Federal Reserve said it would stick to its stimulus plan.
Mowat says the weak earnings are a reflection of the China slowdown. He remains cautions on Chinese equity market even though the Asian bigwig's worst slump since the global financial crisis levelled out in the latest quarter and retail sales picked up in a sign an economic rebound is taking shape, adding to hopes for a global recovery. The world's second-largest economy grew 7.4 percent from the year before in the three months ending in September.
"We see commodity prices falling on economic concerns," he told CNBC-TV18 in an interview.
As far as India is concerned, Mowat says, the Indian market is discounting recovery in growth in the last six-months. "I think investors are waiting for evidence that India GDP is bottoming out," he explained.
Along with India, he likes Mexico and Turkey from the emerging market basket.
Below is the edited transcipt of Mowat's interview with CNBC-TV18
Q: US markets have had a bumpy ride offlate because earning season has not been great this time around. Do you see the stretch of profit taking continuing?
A: I think it is possible. We have the Presidential elections early next month. I think there is a degree of a wait-and-see by investors after what has been some very good months in terms of equity market performance. So, it seems reasonable that markets correct.
Q: So you do see the US Presidential elections in November being a pivotal event for markets?
A: There are two parts to the story. Generally Wall Street would rather have a President who is a Republican. If Mitt Romney was to surprise us in terms of doing better than expected in the polls and come to power, then I think the market would rally.
The next focus of the market will be how is the fiscal cliff dealt with and do we get a quick resolution to the fiscal cliff. In that, there is some agreement on continuing some of the tax concessions that are currently in place. If that is the case, then I think the market will be fine. If it becomes apparent that it is very difficult to get an agreement between the White House and the Capital Hall, then that could be a reason for the market to sell off further.
Q: Where does that leave the macro data which has been coming in? Do you think that might take precedence over the weak earning season that we have gone through?
A: The irony of some of these earnings numbers is what we are seeing is the slowdown that is occurring in China. So, large corporations that have had strong sales growth into China are now seeing contraction of their business there. This has been hitting their earnings.
Another thing to be highlighted is that we have seen weakness in the oil price, which will hit the energy sector .We have had some selective retail stocks having good numbers in the US and broadly speaking the bank numbers have been good. One has to be careful here to generalize that this is a bad result season. It is specific and perhaps it is more a story about the export sector in the US market rather than the domestic story.
Q: Along with the global correction, commodities have corrected crude particularly; Do you see these commodities heading lower?
A: It is very encouraging. We have continued to see commodity prices falling. WTI and Brent are also falling. I think is very good for the global economy. It is particularly good for countries like India, which are very big commodity importers with current account and fiscal deficits.
Q: What is your pecking order for the Asian basket right now? Is India still your favourite market as it has been for the last few weeks?
A: Yes, the big markets we like in emerging markets today are India, Mexico and Turkey. We have liked Mexico and Turkey for most of the year. We upgraded India about 3 months ago. We continue to like some of the smaller markets such as Phillipines and Thailand.
We remain cautious on the Chinese equity markets primarily because of the outlook for profits. But we would acknowledge that the market is discounting fair amount of bad news. We remain bearish on Brazil primarily because of an overvalued currency and an exposure to the commodity markets.
Q: When you talk to your clients about India, do you sense that discernable change in sentiment after the events of September?
A: They already have improved sentiments. We have gone from people effectively, giving up on the Government doing anything at all. There was no sign of any reform.
Now we have had a host of reforms being announced where the executives can pass those reforms. It is occurring that the Finance Minister, who is relatively new to the job, does seem to be determined. I am sure the Prime Minister would like to finish his term with the reputation of pushing through some reform.
So perhaps not in the current session of the Lok Sabha but in the budgetary session Lok Sabha we would expect some of these reforms to get passed. Those reforms that can be passed by the executive will go ahead. That is a very big change in sentiment relative to people's opinion of India even a few weeks ago.
Q: We have seen quite a bit of money coming in since those policy announcements came through. What more would global investors like to see before deploying additional funds into this space?
A: I think the most important thing is the evidence that the Indian economy that has been growing at the slowest level since 2003 is beginning to pick up steam. That would be the most helpful thing for investors. That would give you a positive message that the profits should hold on. So, let us focus on that rather than necessarily reform at this point in time.
Q: We have just gone through the best part of the earnings season. You think earnings are bottoming out in India; downgrades are a thing of the past?
A: Typically, a markets start downgrading six months before the earnings downgrade cycle begins. So what the Indian equity markets are doing, is discounting a recovering growth as we move into 2013. So we don't need for earnings to be downgraded. We need the mindset to be looking ahead to where there is a pick up in economic activity.
Q: How are you positioning yourself now in India and other markets? Heavy on cyclicals and a bit low on defensives?
A: I am an EM strategist. Eighty percent of my market is cyclicals. A very small percentage is healthcare, consumer staples, telecom companies or utilities. And even telecom companies have a lot of regulatory risks around them. I do like cyclicals but I like domestic cyclicals and I remain very underweight materials. So, when we talk about cyclicals let us be specific, because if we are just talking about cyclicals we are already talking about the whole market.