China better placed than India to do business: JPMorgan
Mar 11 2013, 22:19 | By CNBC-TV18
At a GDP growth rate of 4-5 percent, India does stand a good chance to draw foreign investors, but the government needs to push trough reforms and stop blaming external factors for slowdown in economy, believes Andrew Economos, Head-Sovereign & Institutional Strategy, JPMorgan AMC.
He is however, bullish on China saying that a 7-8 percent GDP growth rate is the best in the emerging economies and definietlt scores over India in terms of attracting foreign investments. "India is a very tough place to do business and it has got to get better. So, that puts China in the lead on those two major emerging markets," Economos said.
Commenting on the US market, he feels US relative to the rest of the developed markets looks quite good, but its performance is still subpar given the huge liquidity push it received from the Fed.
The US equity markets closed higher on Friday, The Dow Jones touched another record closing high. The Standard & Poor's 500 Index advanced 6.92 points, or 0.45 percent, to 1,551.18. The Nasdaq Composite Index gained on Friday.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Give us a word on how you are reading the pitch for the US market where data seems to be incrementally supportive and markets have been quite strong?
A: The story of the US has been one of fairly resilient but not buoyant growth. In other words, we have had a pick-up in housing, which has been the bright spot, employment numbers are coming in a little bit better than expected but we are still seeing weakness in terms of household spending as well as income growth.
So, the US relative to the rest of the developed markets looks quite good but still subpar and less than we expected given this huge infusion of liquidity from the Federal Reserve.
We think it is one of the better developed markets. We are seeing a lot of growth there. Things are improving but still subpar relative to the rest of the world.
Q: The market seemed little fretful fortnight back about the Italian election result but it seems to have bounced back quite well. Do you think it has gone from the table as a risk factor or is it just a temporary respite?
A: Italian politics are always an on going story but I want to bring one point to the fore. The point is the complaint or the protest vote that came from the Italian electorate was about politics as usual in Italy, not necessarily Italy's inclusion in the eurozone.
It is a complaint that we are hearing across all the European electorates that effectively we cannot go forward in Europe with politics as usual, things have to change, we need some leadership. So, I would argue that effectively we have to be very careful about what we read into these elections.
It means that we are having some difficulty in terms of putting together coalition governments, and the Italians will maintain the media and political spotlight for a while. However, I think the threat of the ECB coming in to help contain tail risks is enough to keep the politics from spilling over into the market.
That said, if you take a look at the bond rates, you are starting to see the Italian ten year bond still has a 5-4 handle, in other words, 4 percent roughly, around there or 4.8, percent. So effectively the political uncertainty has not spilled over into the economic or the financial markets.
Q: How are you reading the recent data from China and how much of a headwind do you see that becoming for the Asian region?
A: The numbers coming out of China are still okay but relatively weaker than expected, weaker than consensus. The industrial production, retail, sales, even the GDP numbers are coming a little bit weaker than expected. But I think this is more of a cyclical phenomena, and because China is responding to slower economic growth globally. The numbers are still very good, close to double digits in most cases or beyond in terms of some of the lending numbers and retail sales etc but it is going to be an issue going forward.
However, if the question is can China prove to be the engine of growth that pulls up the rest of the world? It looks like that mantle or that title has gone to the United States and China will continue to do its part albeit at a slightly slower levels. So, keep an eye on the Chinese numbers. We should get a big data dampener this week to help firm up our view.
Q: For a global investor stepping back and looking at the region though, if you had to rate the quality of growth in China versus what you are seeing in India (a sub-5 percent GDP handle), where do you think prospects look stronger over the next year or so?
A: China and India will both continue to do quite well and will attract investors' attention because relative to the emerging markets and the rest of the world, 4-5 percent GDP growth rates out of India and 7-8 percent out of China are still going to look quite good, as the rest of the world slows down.
In China particularly, you do have fiscal and monetary levels that the People's Bank of China (PBOC) can pull and the government can use. We need to go through this National People's Congress and sort out the leadership changes, and then I think we will start to see much more policy clarity going forward on China.
India is a bit more of a muddle because we have got some concerns around public sector. We are seeing deterioration and public sector finances as well as in terms of economic growth. The government's heart is in the right place but they have to stop blaming the external sector and have to stop blaming the RBI with high interest rate. They have to push through economic reforms. If they want to attract attention from foreign investors, they have to continue on this reform and liberalization agenda.
India is a very tough place to do business and it has got to get better. So, that puts China in the lead on those two major emerging markets.
Q: In the near-term, just for the next few weeks are the chances of an extension of the rally higher or are the chances of a pullback because the markets are overextended, higher?
A: We are going to have fairly benign and buoyant markets through towards the end of May, somewhere towards the end of the first half. It is a structural issue. There is plenty of money sloshing around. We still have very low interest rates and we have got the central bankers around the world in on the game basically making sure there is plentiful liquidity. So, interest rates will stay lower for much longer than most anticipate. As well as the fact that you have got some improving economic fundamentals on the margin.
However, structurally most investors are underweight on equities globally. As they start to come in and this market does not give them a major pullback to buy in, that slow grind higher is going to force them to start chasing performance, which means we should have fairly good equity markets globally through the first half of this year.
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