Corrections in '10 to be more aggressive, violent: JPMorgan

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Corrections in '10 to be more aggressive, violent: JPMorgan

Positive on equities, Adrian Mowat, Chief Asian and Emerging Equity Strategist at JP Morgan, believes that the news flows will be favourable. However, he feels the corrections in 2010 will be more aggressive and violent.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty?

Q: What about telecom that is a sector which has got punished really severely? Would you take a contrarian call in Indian telecom or do you think the bottom is not here yet?
A: No, I wouldn't take a contrarian call. We have seen in places like Korea that the telecom sector can under perform for many years. When you get highly competitive environment, when you get too many players in a space, it moves from being a high growth profitable sector to a sector that might have reasonable growth in subscribers but very little growth in profitability. What happens is that it's a sector that is owned by growth investors who see growth disappearing and they sell out. The value investors need to see dividends before they get attracted and there is no evidence of attractive dividend yields yet emerging or capital management emerging as a theme within the Indian telecom space. So for now we are going to continue to avoid telcos.

Q: What drives markets higher from here because if you look at India, depending on whose number you go with, you are trading at 15-16 times fiscal year 2011 earnings - that is not horrendously expensive nor terribly cheap either? Do you think there will be another leg of significant earnings revisions upward which can drive markets to the next platform?

A: Globally, there will be powerful earnings revisions. In case of India maybe a little bit less than other markets. India's forward earnings are at near record high already. We haven't had the same contraction in earnings that was apparent in more cyclical export focused economies. So earnings revision will be helpful in India but what is going to be more important for India is slightly less macro concerns and appreciation that growth is going to be higher next year than current consensus. 

Q: Corrections have tended to be not so deep and not too long for our markets and other markets as well. If your call is that there is a correction coming next year - how deep do you think it could be?
A: There is a risk that corrections next year will be more aggressive, more violent. We are affectively developing a whole series of carry trades in terms of characteristic of the way markets are moving. Markets are on the expensive side of averages. There is very little valuations cushion there. But at the moment momentum is strong both in terms of the performance of shares, but also the momentum on newsflow. Bonds and cash are very expensive.

So you get a rally in markets and then you will get events that generate volatility and quite sharp corrections.  It will feel quite like the period from 2003 to 2007 where the bull market in emerging markets had quite a number of violent corrections in it - often moves down by 15-20%.

What could be the catalysts for those corrections? The thing that we fear the most is volatility in G3 bond markets. As we go into 2010, we will still have high fiscal deficits - so plenty of supply of bonds.

We are also, in theory, going to get the end of quantitative easing and perhaps commercial banks will be less willing to add to their duration risk, be less willing to be the big buyers of government bonds that they have been this year.