Why JPMorgan thinks it's good to be overweight India now

"We have upgraded India to overweight on account of the fall in crude prices," he told CNBC-TV18 in an interview.

Crude oil prices fell on Wednesday to an 18-month low, fast approaching the USD 90-a-barrel mark, as investors dumped commodities because of fears about global economic growth.

Meanwhile, the Federal Reserve's latest plan to help the economy failed to impress Wall Street on Wednesday. Stocks finished slightly lower for the day, and not much better than they were before the Fed announcement.

However, Mowat believes no QE3 is actually fundamentally positive for the Indian economy.

"We see the outlook for the Indian economy moving from being extremely poor to one of improving, wherein you’ll see a decline in the current account deficit, lower inflation, GDP accelerating towards the year-end and quite possibly positive earnings revisions," he says.

The investment bank, in a report dated June 21, said it was "overweight" on private banks, IT services, and health care, but was "underweight" on consumer discretionary, energy and materials.

Also read: Fed twists again, extending stimulus to weak economy

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Do you think that in the next few weeks there can still be a liquidity fueled global risk-on rally, given that the Fed has stopped short of QE3? Do you think the European authorities could do something to usher in such a risk-on phase in the next few weeks?

A: I don’t think we are going to see a liquidity fueled rally. On contrary, I think we will have more of a fundamentally fueled rally. The fact that we haven’t had QE3 is extremely bullish in continuing to push down commodity and energy prices. That is good news for the global consumers. It’s particularly good news for economies like India, which suffers from a current account deficit from subsidies of oil products as well as high inflation.

We have just upgraded India to overweight. We see the outlook for the Indian economy moving from being extremely poor to one of improving, in which you see a decline in the current account deficit, lower inflation, GDP accelerating towards the year-end and quite possibly positive earnings revisions. So, no QE2 is actually fundamentally bullish.

Q: What do you expect to hear from the European authorities over the next couple of weeks? There are several meetings stacked up. At the end of that, will global markets be feeling more comfortable or do you think they will start sulking again?

A: It’s very difficult to answer that. These are difficult political decisions that need to be made in Europe. Our wish list would be that the Europeans inject equity across all the banks, whether they be in France, Germany, Spain. At the moment, you are seeing deposits leave the Spanish banking system. It’s more of a bank jog than a bank run at this point in time. But clearly the concern is that you start to see some more strain in the banking system. So, let’s get some more equity into the banks. Let’s move towards a European-wide deposit protection scheme and allow countries a little bit of relief from the fiscal austerity that they have been required to follow. We need to think a bit more about growth stimulating these economies rather than trying to, in the very short-term, narrow fiscal deficits. If we can get that then the markets will be happy.

Unfortunately, the way that this crisis is being playing out is you typically need the markets to force the politicians to make these types of compromises. We are sort of in no man’s land at the moment. Spanish bond yields are high, but they come out of the 7% range. The market doesn’t feel under the same level of strain that we have had at other points in this crisis. So, maybe there will be a lack of urgency from the politicians and then that would be a disappointment for the market. But again it is very difficult for us to judge, it’s a political decision.

Q: What would a fundamental rally imply then in the second half? Is it your call that this is the process that markets will take to trough out to find a more durable base or do you expect to see much larger sized price rallies in emerging markets like us versus what we have seen on the developed market indices?

A: It’s extremely specific. We are overweight India at the moment. We downgraded Russia to underweight. Clearly, it is a beneficiary of high oil prices and suffers when oil prices decline. We remain underweight China. We also remain underweight Brazil, which is a big commodity energy exporter. We continue to like the ASEAN region, but that’s very specific, it’s Philippines and Thailand at this point. We took down Indonesia from an overweight to a neutral. It’s a big thermal coal exporter.

In Turkey, it’s very similar to the Indian story where it has a current account deficit, it’s an oil importer and it benefits from the current trend. So, I think you need to be specific. You need to understand what the macro dynamics are and where the positive and the negative delta are. So, at this point in time, we think India is moving into the positive delta environment after spending much of the last 24 months in a very negative delta environment for the macro economic factors in India.