EMs' weakness not externally driven; cautious on India: JPM

Blaming fundamental headwinds in Asian markets, Sunil Garg, managing director, Head- Asia Banks & Financial Services, JP Morgan, says the weakness in emerging markets is not externally driven.

"A lot of the volatility and the weakness in Asian markets is not just external but there are fundamental headwinds in some of the large investable spaces within Asia," adds Garg. Garg bases his cautious outlook on Asia and emerging markets based on the Japanese and Chinese monetary policy.
Also read: Too many bullish FIIs pose a risk to market: Morgan Stanley

On the Indian market, Garg sees vulnerability in the short-term. Despite the market rallying on optimism, Garg has a short-term cautious stance on it. Below is the edited transcript of Garg's interview to CNBC-TV18.

Q: Do you sense a palpable risk-off brewing in global equities? Or do you think it is just a temporary wind which will blow over?
A: If you look at the Asian and emerging markets in particular, they have already been lagging behind the developed markets for sometime. For example, if you look at Asia, India and other emerging markets and their performance vis-à-vis the US Asia, they have all have underperformed.
A lot of the volatility and the weakness in Asian markets is not just external but there are fundamental headwinds in some of the large investable spaces within Asia. So, I don’t think this is only an externally driven uncertainty. However, we do have policy uncertainties coming up with US Budgetary cuts or atleast the discussion around that. There is also the Japanese monetary policy, Chinese policy so, all these are weighing in factors and we are sitting on top of some reasonable gains in the markets. It is atleast a reasonable excuse for investors to take some money off the table. We are certainly cautious short-term in Asia and emerging markets. Q: India has had disproportionately good run in terms of the flows that it has been getting and the observation seems to be that a lot of it was exchange traded funds (ETF) lead money. In that context, would you say India looks more vulnerable than other markets to this outflow situation?
A: From a money flow perspective, we have had substantial foreign institutional investor (FII) flows but we haven't seen the market do very much. The Nifty is been flat so far and we are sitting on valuation premiums now to the regional and emerging markets. We are sitting on a corporate earnings picture which still needs to turn substantially. So, there are fundamental question marks. The market's gone up on optimism, on some of the reforms that the Finance Minister is been talking about. So, there is vulnerability in the short-term. We do like India on a one year view but in the short-term our view is definitely cautious in India. Q: March 1 is when the deadline hits for the US markets on the Federal Budget cuts. Do you expect any correction to come in quite sharply and swiftly across global equities? Or do you think this is going to be a dragged out process through the first half of the year?
A: Certainly this is a dragged out process. This is unlikely to be the August 2011 kind of scenario when you had a US rating downgrade which led to the knee-jerk correction in markets for a substantial both, quantum and in terms of time. What we saw right at the start of the year when the fiscal cliff negotiations, were sealed at the last minute. So, this is likely to be much more of a dragged out volatile period rather than a single point knee-jerk, big leg down like August 2011. Q: Do you expect a substantial price correction though around the Budget? Or do you think the Budget is an important turning point in determining how India will do relatively against other markets?
A: It is clearly a very important policy statement for announcement next week. Historically, it used to be a huge issue. I guess it is less of a policy statement these days. So, unless the Finance Minister comes out with some very major changes, the focus is largely going to be on what is the execution follow through on a lot of the reform announcements that have happened. So, at this point we are not putting a lot of hopes on major changes in the Budget but there is clearly room for surprise and that could then act as a trigger. However, we are not viewing it as a base case. Q: You keep an eye on financials across the region. How have you approached banks in India – public and private sector?
A: The one area which has been of some concern is the asset quality deterioration especially at the PSU banks that has been coming through. Some of that is clearly lingering impact of an economy that has had a slowdown. At this point in time, our preference of financials in India is very selective and just focusing on high quality. Infact, our recommended approach at this point in time across the board is that there are uncertainties. So, essentially, improve the quality of your portfolio by moving up the quality chain in higher return on equity (ROE) companies. That very much applies to the Indian banking sector as well. So, PSU banks, definitely cheap as they might look, but there are concerns on whether they can perform from here, atleast in the short-term.