I don’t believe the US will be going into a recession: Adrian Mowat

Emerging equity market strategist Adrian Mowat

Adrian Mowat shares with CNBC TV18 his thoughts on global stock markets. He sheds light on US inflation and the toss-up between bearish and bullish future growth rates. He also compares India and China by growth and valuation while talking about major global indicators. Here are glimpses of the interview:

Are we at a point where this counter trend in global equity starts to get challenged? What is your view?

There are a couple of very important issues to look at here. The Russians have shut the gas supply to Europe. It might be a short-term issue to be focusing on because there are debates that they might reopen the tap in a week or so. The consumer is also witnessing a substantial increase in energy bills; the other reason is that China is getting tiny modest outbreaks of Covid which is resulting in serious Covid policies - lockdowns in major cities like Shanghai.

Other areas to look at are the earnings season. I think there’s a degree of misinformation going on here with respect to earnings. There has been an increase in EPS (earnings per share) of the energy sector, if we look at the commodities; and other sectors have gone down. We have major stock declines in the prices of Amazon, Target, Walmart -- they all have been announcing poor earnings in terms of the outlook. I think there might be a chance that earnings will surprise positively if the bearish trend works in our favour. 

One of the reference numbers for your answer is also the US CPI (consumer price index), the number that they are targeting is 8.8. 1 think there is a chance that the markets will react positively to this number. This is partly because when we look at market indicators, we have a very strong dollar which is good for bringing down US inflation, the commodity prices have fallen, and the cost of shipping from India to the United States is down 20 percent year on year. If we also see oil and gasoline prices move a bit lower, then the inflation number may get pushed into the background. 

For markets like India, how much of this dollar surge is going to be a risk factor? If we see more selling from FIIs (foreign institutional investors) and weakening against the dollar, then what do you think the second half of the year is going to look like?

When we look at India in the context of what’s going globally, yes the rupee has been weak versus the dollar. But it’s actually very relative to other currencies - the move has been more modest. At the extremes, look at where the yen is at the moment. If I look at the movement of Nifty and the movement of rupee, India has proved to be quite resilient, in what might have proved to be a vicious bear market. I think for India to stabilise, we really need to look at two things - one is that the US bond yields continue to decline -- that’s going to be valuable in stabilising earnings in the tech sector. The other thing is that India potentially has less inflation worries in comparison with the other emerging markets. So if we see any moderation in India’s inflation numbers, that’ll be quite helpful. 

Putting those two things together, I think India is continuing to be an outperformer. But whether you can make absolute returns depends on whether the Wall Street is able to make absolute returns. 

There is potential that as we enter September we can see a powerful rally in global equities as we move through this focus on inflation as a key concern. I don’t believe that the US will be going into a recession. Yes, the US may have a technical recession because of the adjustment in inventories in this quarter -- it’s more bullish for future quarters. 

If we talk about China versus India, China is obviously far cheaper in terms of valuation but they don’t have those kinds of earnings growth. In India we are trading towards the higher rent of the valuation parameter. So what’s the toss-up between them?

We have a very different kind of trend going in discount rates. We have an inflation issue here in India, but China doesn’t have an inflation issue. So the discount rates in China haven’t been moving up like the rest of the world. If China can modify this extraordinarily damaging Covid policy, then they have the probability of the highest year on year growth in consumer activity and economic growth.

So if they are not held back because of their policies, they might outperform India.