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EMs have suffered from unfair damage: JP Morgan

Published on Tue, Aug 21, 2007 at 12:27 | Source : Moneycontrol.com

Updated at Wed, Aug 22, 2007 at 12:41

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Adrian Mowat of JP Morgan feels the worst in global equities is behind us and the markets will gradually trade higher. The Fed may lower rates by 25 bps at its September meeting, he said, adding that the Fed is now concerned about growth rather than inflation.

Mowat feels that unpleasant news coming out from the US will continue. He added that the news is overly discounted.

According to Mowat, emerging markets have suffered from 'unfair' collateral damage. Investors have owned assets that they couldn't find a market for, so they sold off other assets such as US blue chips and emerging market stocks, he said. Long-term investors could look at this as a good buying opportunity, he added.

Mowat cautions that India is more susceptible to a housing market crisis than other emerging markets. He feels that select Indian companies are susceptible to credit issues due to ECBs and M&As. However, he is quick to add that there is no serious threat to the Indian economy.

He is also concerned with the political developments in the country and feels that it may depress sentiment.

Excerpts from CNBC-TV18's exclusive interview with Adrian Mowat:

Q: Are we through the worst or is there much more to come?

A: We are through the worst. What the Fed did on Friday was very important. The first thing they did was to ensure that there is plenty of liquidity for the US financial system by reducing the discount rate. There was also a major reversal in their rhetoric. They had been focusing on inflation and now they are worried about price stability. The rhetoric has moved to being concerned about growth, which allows it to cut rates if there is any weakness in the US economy. We feel there will be a pre-emptive strike on September 18. The Fed will lower rates by 25 basis points. The markets can feel reassured that the liquidity crunch in the credit world is going to ease and that their concerns about the economic impact will be less because they know that the Fed will now act.

Q: Do you expect to hear more bad news from the mortgage market in the US, over the next few days, which might keep the markets volatile till we get to September 18?

A: You are going to continue to see unpleasant news coming out of the US credit markets, particularly with regards to the property markets, where we have seen a marginal declined in prices. However, that news is well known by the markets and is probably overly discounted.

Q: What is the emerging market universe takeaway from all this?

A: Emerging markets have suffered from a huge amount of unfair collateral damage on account of the sell off that we have seen. Investors who have own assets such as asset backed securities, credit derivatives etc, which they couldn't find a market for, have ended up selling high quality equities be it US or emerging markets blue chips. That sell off became particularly intense towards the end of last week. This presented a good buying opportunity for long-term investors. Since the 2003 bull market started in emerging markets, this is sell-off number seven. The correct activity after these sell-offs is to buy as they usually provide very good buying opportunities.

Q: Is India among those for you?

A: I do like selected stories in India, although I feel it is probably more susceptible to the credit problems than other emerging markets. Indian companies have used external commercial borrowing and have been issuing corporate debts abroad. They have also been quite aggressive in external acquisitions and some of these external acquisitions will need to be refinanced. I don't see it as a serious threat to the Indian economy or to foreign exchange reserves. The government is doing a very good job, particularly RBI, in managing these liabilities. However, it might cause some more company specific issues than that apparent in other emerging markets.

Q: What about politics that has the market worried for the last couple of days. Would you worry about what is happening on the nuclear deal?

A: The impasse in Parliament is a concern to us and that is hitting markets. This could depress sentiments and the longer this last, the more India will struggle to outperform other emerging markets, where may be political issues aren't so important.

Q: Do you expect to see much more by way of deleveraging in emerging markets than we saw in the last fortnight? Is there more to come?

A: I don't think so as we have past the extreme points of deleveraging. Those that have to deleverage, have to do it very rapidly. The proprietary trading and hedging desks have to act automatically in these sell offs. We have seen the worst, the Fed has put a floor on the story and you are going to see markets gradually regaining their confidence and trading higher. What this is really about is, in a quarter's time have earnings kept on tracking, are the GDP numbers still on course, have interest rates within emerging markets stayed around their low levels. That's what we believe will happen. We were exactly in the same position in June 2006, it presented a good buying opportunity, and the outlook then was very mixed. What ultimately came through was the robustness of these economies.

Q: Would you say then that for the second half of this year there might be a shift in terms of risk aversion and money flows as well? Could there be some repatriation into emerging markets?

A: I think there will be. When the global asset allocators have seen that things have settled down, they are going to focus once again on where is the growth. The growth is within emerging economies. The outcome of the US credit problem means that there is relatively less growth in the developed world, particularly the US.

Q: When the situation was developing, there were concerns that the liquidity was going to get pinched very hard. Is that the biggest problem right now? Has that shifted now to a pure economic growth problem for the US?

A: I think that's where investors' focus has moved. Initially, it is the lack of liquidity in the credit market, be it credit derivatives or asset-backed securities, which has a massive portfolio impact on nearly all asset classes whether they are currencies, commodities, or equities. People are now wondering whether there is a real economic impact from what happens in the US. There has to be some economic impact as the cost of borrowing is higher in the US for the real economy. The availability of mortgage credit is less than what it was before this event occurred, which suggests that the level of aggregate demand out of the US is going to be more modest than what was in people' forecast at the beginning of the year. I believe there is enough momentum in the rest of the world to more than offset that weakness.

Q: How high are the chances of most Asian emerging markets reclaiming their old highs in the next couple of months?

A: I am not sure if it is the next couple of months but I am very comfortable that they will do it by the end of this year. That's still offering pretty good returns from current levels.