Of late the US fiscal cliff has been a cause of concern globally and Adrian Mowat, Chief Asian and Emerging Market Equity Strategist, believes markets around the world are likely to be volatile due to the debt ceiling negotiations.
Of late the US fiscal cliff has been a cause of concern globally and Adrian Mowat, Chief Asian and Emerging Market Equity Strategist, JP Morgan, believes markets around the world are likely to be volatile due to the debt ceiling negotiations. As a result, he advises clients to be cautious ahead of the negotiations in the US. He suggests investors to buy into a possible correction.
Mowat further added that there were huge inflows into emerging market fixed income in 2012. According to him, equities are likely to find support from funds switching out of fixed income. Moreover, emerging market equities have an opportunity to fare better in 2013 when compared to the last calendar year. Global equities are also likely to outperform in the second half of the calendar year 2013, opined Mowat.
However, he is not very optimistic about India replicating its 2012 returns in 2013. He feels gains in India are going to depend on government policy action. He is of the view that the Indian market may underperform global markets going into the budget.
Below is the edited transcript of Adrian Mowat's interview with CNBC-TV18
Q: Between now and the end of February, are you expecting to see some volatility and turbulence in global markets as they resolve issues of the debt ceiling etc?
A: Yes, I think investors should become a bit more cautious tactically. In the long-term we are very bullish on markets but, as we look into February, we need to deal with the debt ceiling, we need to deal with the fiscal cliff as we did not have a fiscal cliff deal. We decided to postpone the decision until February.
It is important to understand the context of this. There does not seem to be any unity within the Republican Party. So it is going to be difficult for the White House to find out who to negotiate with in order to come through with a deal.
If you then look at the economic data in February, that might show you some weakness. When you receive your pay-cheques in the United States at the end of January, there will be less dollars in those pay-cheques because of the increase in the payroll tax. I do expect the volatility to pick up. My advice to clients would be to be a little more cautious in the short-term.
Q: Are you expecting a significant pullback in markets and if it were to come about over the next six to eight weeks, would you advice your clients to buy into that weakness again?
A: I would definitely advice them to buy into the weakness. Our base case is that we would see markets coming off but do not see a significant pullback, nothing like we saw maybe in May 2012. However, it is important to look at the current consensus view, which is that economies are okay, they are generally improving, European risk is low, emerging markets (EMs) economies are also getting better. When that is the consensus, you are open to a little more disappointment. The focus of our concern with the sale off though is very much the United States.
Q: Do you expect a 5 to 10 percent correction and would that be equal for all markets because the last few weeks of December did see weakness for the US markets but that did not necessarily translate into weakness for Asia?
A: I think it would be for all markets rather than just for the US. So the US did not fall but, it did not outperform the other markets that were rallying. But I think if the US is correcting and you tend to see the correlation rise with other markets.
Q: To talk about flows for a little bit, what kind of trajectory do you think flows will take for at least the early couple of months in this year because that has been phenomenal, especially for markets like India and most recently China as well?
A: What we saw last year was huge inflows into fixed income, particularly in the emerging world and relatively good inflows into emerging market equities. As you highlight, those were somewhat back-loaded towards the latter part of 2012.
We do believe that the big medium-term call is a swing of money out of fixed income into equities and that is what makes this bullish equities medium-term to long-term, even though we may have a more short-term cautious view. I would see India benefitting from that as I would see other emerging markets benefitting from that.
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