Real-time Stock quotes, portfolio, LIVE TV and more.
Mar 12, 2012, 08.38 AM IST
With the country's economy reeling under high inflation and slowing growth and the Congress in a paralysis, uncertainty lurks Budget 2012. Market thinker and economists, Adrain Mowat of JPMorgan in an exclusive interview to CNBC-TV18, shares his key expectations on whether the budget can be a make or break event the market this time.
It is that time of the year when all eyes are set on Pranab Mukherjee and his antics to cater both India Inc and the common man. However, with the country's economy reeling under high inflation and slowing growth and the Congress in a paralysis, uncertainty lurks Budget 2012.
Market thinker and economists, Adrain Mowat of JPMorgan in an exclusive interview to CNBC-TV18, shares his key expectations on whether the budget can be a make or break event the market this time. Mowat explains that with the general election in a yearís time, there is a 'small possibility' that the Budget surprises the market positively.
However, he says investors have already written off the government. "They have factored in an environment that is extremely difficult to pass legislation," he added.
Below is an edited transcript of Adrain Mowat's interview to CNBC-TV18. Also watch the accompanying video.
Q: What bearing do you think the election results in Uttar Pradesh (UP) has on the market in India and how it sets the stage for what might be delivered in the Budget this time?
A: We have to look at the expectations of the investors. Ever since the 2G-scandal occurred in India, the expectations on politics, government actions have been extremely low and investors have been focusing on the policy environment. Also, the inflation dynamics were poor last year in India and as we came into this year, the inflation finally fell below 7% level.
We also had RBI reducing cash reserve ratios and the market has been very sensitive to that. My clients have written off the government and government action and donít expect anything out of politics. They have already factored in an environment that is extremely difficult to pass legislation.
Q: Do you think the UP election results would make them even more circumspect or is the bar set so low that it cannot be lowered any further?
A: My bias is to say that the bar is set so low by the equity investor; it had an influence on the currency investor and the fixed-income investor. And, maybe that is where we might see a little bit more strain. The market outperformed in local currency terms than other emerging markets but in US-dollar terms, it was about the same because of the rupee weakness.
Q: Do you think this will have any bearing on the kind of flexibility that the finance minister has? Are you expecting a bold Budget or a muddle through kind of a Budget this time?
A: If the Congress came out with a bold Budget and sends a strong message that they have the right platform for Indiaís growth, it would seem to be a rational way of improving their stance in the polls. Hopefully, when there is a general election in the next 12 months, there is a small possibility that the Budget surprises the market positively.
Q: India's problem has been one of a very strain fiscal. Do you expect to see some material measures in fixing that fiscal deficit with measures like fuel policy changes in this Budget or leading up to it or do you think that is being too hopeful?
A: I think itís extremely unlikely. The FM would impose a greater burden on Indian voters by putting up the price of diesel and kerosene, ahead of the general election and particularly when you had such a poor show in the State elections. So, I don't expect any improvement on that front. We hope that the oil price continues to decline from recent highs and that the rupee remains relatively stable, so when that dollar oil price is translated into local currency it looks fine. I first started investing in the Indian market in 1993, India had a twin deficit current account and fiscal deficit and I suspect when I retire maybe in a decade or so, India will still be suffering from both deficits.
Q: What do investors tell you when you speak to them about India and oil?
A: Both Turkey and India, with their current account deficit large energy import bills, broader commodity import bills sell off when you see high commodity prices, higher energy prices relative to other emerging markets and it works in their favour as the oil price comes down. The Chinese economy is significantly weaker than even the 7.5% that Premier Wen was talking about at the beginning of this week.
The bid for both oil and commodities is very weak fundamentally and as we move into April and get the March economic data from China, it will give a clear message of a weak economy without the distortion of Chinese New Year. I expect commodity prices to be coming off and hopefully, oil prices are going to be the most important dynamic for the Indian stock market.
Q: Amid the Budget, the elections and high oil prices, would it be a good entry point in the belief that commodity prices will come down later in the year and that is a big tailwind for the Indian market?
A: This pullback in markets is what many investors have been looking for. When you look at performance of the open-ended mutual funds, it suggests that the investors been struggling to participate in this rally. They need more risk on the Indian markets and currency move very fast and I donít get the sense the clients got position there. Hence, the pullback in the market due to politics, fear that the Greek deal will not go through in our opinions are opportunities to add risk and equities.
Q: Your view has been constructive on emerging markets, since the start of the year but within that constructive view where would you put India right now? Do you think India might be one of the outperforming markets having done so well in the first couple of months or a relative underperformer?
A: India will outperform but I will be very focused on sectors. So if you look at the composition of the Indian market you have got some nice defensive sectors such as fast moving consumer goods companies, tobacco companies, those did extremely well in 2011. I see them lagging in 2012 just as the IT space is likely to lag as its relatively defensive whereas Indian industrials, Indian financials which were sectors that fell by more than 40% last year are just relatively early stage of their recovery so have a nice cyclical interest rate sensitive portfolio in India, rather than moving to big overweight in the Indian market.
Q: How is the world looking to you now because post LTRO II, we havenít seen the kind of bang which or liquidity which a lot of people were thinking about? Do you think incrementally that kind of liquidity is not able to fire up markets or is this just a temporary lull in your eyes?
A: The way we see the world, it is bad now, although not as bad as market assumes. Many of the fundamental and structural issues still exist but the US economic data has been better than people have expected. We have had a very consistent increase in the non-farm payroll and inflation is moderating even with the recent rise in the oil price. 80% of the US economy has consumption, so we have more confidence in the growth forecast for this year.
Equities look extremely cheap versus fixed income and hence, we see this as one of those years where risk premiums are excessively high, gradually reduce as people have a little bit more confidence in the outlook rather than the necessarily predicting a particularly strong outlook.
With regards to the latest LTRO, there is a huge amount of liquidity being generated by the ECBís action with the LTRO much bigger than the previous one. However, the market was skeptical about LTRO and began to move after it was seen to be effective, whereas the market has rallied ahead of the latest LTRO. Therefore, it has been partly discounted. So, the liquidity effect on the ground in the financial system is bigger but the market had already discounting it.
Q: What are clients telling you? Are they saying that this is the dip we wanted and we should be allocating in equities now or are they saying we did the right thing in not participating to begin with because fundamentals never improved and therefore, we continue to sit on our hands?
A: Clients have been saying that they were looking for an opportunity to add equity risk but the way the market is behaving, they are looking for better buying opportunity. Broadly, what is going on in terms of client flows is when markets are selling off, we see very little selling action by clients and when markets begin to rally, trading volumes tend to pick up. It usually implies that people are trying to get more money to work in the equity markets.
May 18 2013, 17:26
- in MARKET OUTLOOK
May 17 2013, 12:39
- in MARKET OUTLOOK