SENSEX NIFTY
Mar 28, 2013, 02.13 PM IST | Source: CNBC-TV18

Overweight on India; see good return in 1 year: JP Morgan

Adrian Mowat, Chief Asian & Emerging Equity Strategist at JPMorgan feels China is more concerned about earnings. He also added that Japan is outperforming due to the encouraging statements made by Bank of Japan.

Adrian Mowat

Chief Asian & Emerging Market Strategist

Expertise : Equity - Fundamental

More about the Expert...

The European crisis have weighed over global markets for quite some time but, Adrian Mowat, Chief Asian & Emerging Equity Strategist at JPMorgan believes China is more concerned about earnings. He also added that Japan is outperforming due to the encouraging statements made by Bank of Japan. Going forward, he expects this outperformance to continue.

Also read: Neutral on India; see little follow-through on reform: HSBC

Mowat told CNBC-TV18 that the Indian market is performing in line with other emerging market economies. But, it will be difficult for the government to meet its divestment target, he opined.

At the moment, Mowat is overweight on India and sees good returns over the next twelve months. According to him, policy and governance issues are likely to be key risks for the Indian market.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Market seemed quite nervous about the news flow that might come through from Cyprus as also the political noise one has been hearing from Italy since last evening. Are you getting the sense that we could be headed for a sharp cut around these news events?

A: I do not think so. I would argue that the market in China is more concerned about the end of the results season. They are not really sure what to look forward to. The banks came out with good full year results, but it is quite likely that Net Interest Margins (NIM) and credit costs are going to be in the wrong direction in the first quarter results, which will be out within a month.

With regards to Japan, it is a market that has had an extremely powerful rally. The Topix was up 22 percent quarter-to-date when we started this morning. So a little bit of profit taking cannot be ruled out as we run into the Easter holidays. It seems quite reasonable. I am actually surprised how little discussion I am having with clients, with regards to Cyprus.

Q: How do you read all these moving elements? This year has been extremely different from equities than what we have seen in the past. There is the US and Japan which seem on track to making new highs for themselves. The eurozone is in a mess and Asia has been quite disparate as have been emerging markets. Is that the trend you think we are going to live with this year that no two markets will move in the same direction?

A: The environment is beta poor in emerging markets, but alpha rich. It is important to understand what exactly is going on here in these major markets. In the US market, we are seeing a high level of buybacks. It tends to favour companies with more stable earnings and that is why staples have been outperforming.
 
We are also seeing leverage buyout transactions such as what is going with Buffet buying into a large soup company. He is borrowing at 3 percent, buying a company with steady earnings and an 8.5 percent pre-tax earnings yield. That is the support for the US market. With us likely to have zero interest rates well through 2015, I see no reason why that should change.

We were optimistic about what is going on in Japan. I would expect Japan's outperformance to continue and what we are finding in the large emerging markets is that people are confused by policy in Brazil, Russia. Sentiment on Russia is particularly low and maybe that is more directly affected by what is happening in Cyprus. They are confused by policy in Brazil. They are looking at Korea and Taiwan and saying these are the countries that suffer as the Yen weakens.

Hence, large cap EM is out of favour but smaller EMs like Thailand and Philippines are outperforming the US and Japan. That is because they have got a very good economic momentum. We have just upgraded Malaysia at the beginning of the week. We like that story with healthy domestic growth, both for capex as well as consumption. So there are things to do here, but they tend to be in the smaller parts of the benchmark.

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