Remain overweight on India, see capex revival: JP Morgan

JPMorgan AMC continues to be bullish on Indian equity market. “We are still seeing relatively good inflows into India. Though CPI inflation remains a concern, the fall in WPI data was a shot in the arm. The fall in gold and crude price will also be of big help to India,” Geoff Lewis of JPMorgan AMC said in an interview to CNBC-TV18.

The news of a blast at the fnish line of the Boston Marathon spooked global investors already rattled by the economic data. But Lewis doesn’t see this incident having large scale ramifications on global financial markets. Besides India, JP Morgan AMC is also overweight on Japan and China.

Below is the verbatim transcript of Geoff Lewis's interview on CNBC-TV18

Q: What are your thoughts on India because everyone is talking about a change in the Indian macro situation particularly on the external accounts side? How much of a perceptible difference are you seeing in the attitude towards India now and would you have a tactical change in call on India?

A: We are still overweight on India, so we haven’t made any short term tactical call. We are still seeing relatively good inflows into Indian market. We are hoping that we will see the beginning of a revival in capex demand and the growth probably has bottomed. Of course, there are vulnerabilities and the external sector is to be watched and we are keeping a close eye on that.

Q: With gold and crude falling so sharply, the current account deficit will reduce, inflation numbers have been falling and the last number we got after 3.5 years is below the six percent mark. The negative macro appears to be readjusting. Will that add to India’s attraction?

A: We found India to be attractive. We saw that macro problems have reached and adhered last year and so we have been overweight on India since quite early this year and are therefore, not making any changes. On the inflation, the wholesale price index (WPI) numbers were particularly good with a deceleration into 6 percent in the latest month below the consensus focus of 6.3 percent.

Like a lot of investors, we are still wondering how the RBI will respond to the divergence between the two measures of inflation, between the CPI new index measuring consumer prices and the wholesale price index. The CPI should be able to broader measure but has not been a target for inflation policy and seems to be sticker than the WPI. There are still concerns on inflation front, but the WPI data were a shot in the arm. It is a sign that the slower growth is now leading to less pricing pressure. Fall in commodities is also a big help to India.

Q: What is the impact of the Boston blast? Are we going to see any significant sentiment?

A: It is a terrible incident but I don’t think it has large scale ramifications for financial markets. I don’t think it will have a long lasting impact.

Q: For several months now and accentuating in the last three months was a trade of long developed markets, long US and short commodities, short emerging markets as well in the last few months. Will that trade continue now as we are seeing a series of weak US macros?

A: Equity markets are well placed to look through short term problems. Everybody knows that the second quarter on the real economy side is likely to be less good, less robust than the first quarter which surprised on the upside in the US but people are nevertheless, seeing signs of broader recovery. So, I don’t think that is going to be a big move away from the US.

Earnings revisions for the emerging markets are still, the momentum index ratio of upgrades to downgrades is still in negative territory although it has stabilised in recent months.

We find some encouraging signs like upgrades in China and various other emerging markets starting to take hold now. Once we see more signs that earnings have bottomed and stabilised, then if it is the risk on trade that is going to continue, we should see a migration towards the emerging markets particularly as they are now looking much better in value after the under performance that has surprised investors in the first quarter.

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Q: Is Nikkei another magnet away from the emerging markets? Money has been diverted from these funds towards Japanese funds as well, will that attraction continue?

A: I certainly think so. Investors are giving Shinzo Abe the benefit of doubt, his popularity continues to climb since he took office. In contrast to that, all his predecessors whose popularity fell very quickly, he has a mandate for change. He is serious about changing the path of Japanese economy and trying to bring it out of the stagflationary mire. Whatever he does, moves in the right direction.

In the short term, a lot of fund managers, now they know that they have to call this move right. A lot of them seriously underweight Japan and are now moving back to overweight so that takes the emerging markets out of the limelight in the short run. In the longer term, more vibrant Japanese economy, part of Asia-Pacific growing regional business cycle is going to be very good for other Asian stock markets.

Q: How worried are you about the Q1 China GDP figure that came in sub-8 percent and lower than market estimates? Would that make your change your allocation towards Asia in anyway?

A: It was disappointing. We will see a revision down in the consensus growth forecast that was at the top of the range like 8.5 percent, they will come down to 8 percent which will further come down to 7.5 percent. But I do not think we will see a major change in policy. The fact that the real economic data was a bit weaker, now, reduces the chance that the People's Bank of China (PBOC) will start to tighten monetary policy.

Generally, there are doubts that we need to look at, in particular the growth of the new credit impulse as measured by total social financing that was still very large in the first quarter. It seems to have delivered not much in the way of real growth as we were expecting. The economic policymakers in Beijing will also be looking at it very carefully.

Q: How much more of a sell off in commodities do you expect, seminal falls in the past two weeks? Do you think crude and gold gets cheaper and what about the other commodity complex like metals?

A: There was a bid in for some of these commodities as an investment asset and not in commodity terms. So, the oil market has always been well supplied in physical terms. Now, there maybe geopolitical tensions of east somewhat particularly with the continuing good news as the US begins to get less dependent on imported energy, not just with shale gas but also with oil recovered from shale formations, new technologies there and each month US imports less oil than before. So, it is not surprising that we are seeing relatively stable to somewhat weak oil prices. That has always been our central forecast and has to be good for the global economy.

We don’t want to see collapse in oil prices, nor do we want to see a sharp spike. We want to see the continuation of this sort of moderate price weakness. The rest of the commodity complex given that China hasn’t really picked up in a V-shaped recovery, it is not surprising that some of those forecasts based on expectations from China will continue with ferocious appetite for iron, steel, copper, that the commodity complex has come off. I would not expect it to pick up sharply in the immediate term.

Q: What are your top three asset classes and where does India fit as an asset class at all?

A: Our top asset class in global portfolios would continue to be equities. We would continue to look for a quality bias. We would also have something of a bias towards dividend paying stocks and within equities we would overweight the US. Within emerging markets, Asia will be our strong preference and within the Asian region, we would be overweight on markets like China and India. We are also overweight on Japan.

In terms of other asset categories, we still think it is good to be diversified. We will be underweight on G7 government bonds. We would be overweight on credit products including emerging market debt and would still have a diversification into alternative asset classes. So, it is not the time for big geographic bets. The correlations between asset classes and within stocks, within equity markets are normalizing. So, it is becoming better for bottom-up stock pickers who should be able to find good value for a longer term within these markets.