'Equities to head higher in Q1 on better Q4 fundamentals'

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets

Adrian Mowat of JP Morgan tells CNBC-TV18 that equities are likely to move higher through the first quarter of the New Year. He says that there are marked improvements in fundamentals seen in the last quarter of the financial year. "Sovereign credit risks have declined sharply in the US and a proactive ECB has ensured ample liquidity in Europe," he says.

According to him, the only risk to equities is China having a hard landing.

Mowat says that material and energy sectors are likely to see more strength and moving ahead, emerging market issues such as inflation will ease out.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Do you see this global party extending for the next few weeks or are you drawing the line here and taking profits?

A: I see this extending. It is very important that we don't get caught up in behavioral biases of anchoring. The Indian market had a terrible 2011, down nearly 40% from the perspective of a US dollar investor. We have had a rally of 20% from these lows. That is not a reason to take money off the table. You take money off the table if you believe that the fundamentals are going to be deteriorating.

What we have seen at a global level is we are getting better US economic data, quite consistent expansion in the non-farm payroll, and that is very important because that means that household income in the US is rising in nominal terms. Additionally, we are seeing a decline in inflationary pressures in both the developed and the developing world. That means that real income growth is going to be reasonably supportive in 2012.
In Europe, we have an extremely active European Central Bank that is ensuring that European financial system remains liquid. We have seen sharp reductions in the spread of Italian and Spanish bond yields versus German bond yields. That's reflecting a decline in the European risk.

Finally, in the emerging world, inflation is coming down. Let's take the situation of India. At the end of last year, most of us had given up hoping that inflation would come down and the Reserve Bank would ease, or inflation is coming down in the India and the RBI is moving to an easing bias.

So I think the fundamentals have improved markedly in the last quarter and equity markets, which did very badly last year, are recovering and we are at the early stage of that recovery.

My reflection on what clients have been doing is clients are still in the process of closing out shorts rather than putting on aggressive long positions. I think markets have been driving investors rather than investors driving the markets.

Q: So tactically, you would still be a buyer on India and how do you reckon the first half of the year will now play out because the first couple of months have been very different from what people expect to see?

A: I think we will continue to move higher through the first quarter. If there is a threat to emerging market equities, is that China is having a hard landing. If you look at steel and cement production, they are declining in China as the effects of the property market rolling over gets see-through into demand of physical commodities, construction activities. With the risk-on trade, we are watching cyclical factors including materials and energy moving higher. I think that's a good fundamental bid why industrials should go higher, why tech manufacturing should go higher, consumer discretionary, but I don't think that's a good fundamental bid why commodities should move higher because of what's happening in China. Maybe in the second quarter, when you get clear Chinese economic data without the distortion of Chinese New Year, then the commodities markets are going to wake up to the hard landing in China fixed asset investment.