Bullish on India; EMs overreacting to taper talks: JPMorgan

The Federal Reserve Board and the Federal Open Market Committee (FOMC) on Wednesday released the attached minutes of the committee meeting held on July 30-31, 2013.

In an interview to CNBC-TV18 David Kelly of JPMorgan Funds said that the Fed's minutes showed exactly what was already known, but the global markets overreacted to the news today because the tapering was not fully priced in.

He is bullish on India over a long term, despite the fact that emerging market (EMs) are vastly overreacting to the Fed taper.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: What were your takeaways from the Fed and what does it mean in possible quantum and timing of tapering now?

A: I think the Fed’s minutes said exactly what we already knew. The Federal Reserve is planning to begin to remove bond buying by the end of this year and expect it to be done by next summer. So, they are going to go from USD 85 billion of purchases right now per month down to zero by next June or July.

I think the market overreacted to the news today because the news has not been fully priced in. Markets are not reacting quickly enough to the fact that Federal Reserve has removed this or is removing this tapering or this monetary ease. So, it’s already a delayed action but there is no new news here. We know the Federal Reserve is going to remove bond buying and we know that is going to push on from interest rates up. The problem is that long-term interest rates still have a good ways to go up at this stage. That is why interest rate continues to move up and that is having an affect on global markets.

Q: Quantitative easing (QE) tapering has now discussed all the way since May 22 but it seems like it is not priced in. When do you think it will possibly get priced in and what would be a fair value for the 10-year for it to indicate that it possibly is priced in?

A: The important thing is to focus on interest rates. Right now 10-year treasury yield in the United States is at about 2.9 percent. I believe that once the Federal Reserve is no longer buying bonds that yield ought to be somewhere between 3.5 percent and 4 percent. So, we still have about three quarters of a percent to go before we get to some measure of fair value.

There is no reason for the stock market to fall in reaction to this. The stock market is not expensive in the United States and is not expensive around the world. I think people are worried that these rising interest rates might slow the US economy but they are wrong. If you look as particularly existing home sales today in the United States, rouse to the highest level in four years despite rising interest rates and so I do not think rising interest rates will slow the US economy and when investors see that I think the stock market will recover in the United States and probably around the world.

Q: Driving attention to emerging markets; there has been a practical rout of both currencies and equities. Do you see them plateau now?

A: Absolutely. If you think about the magnitude of declines in emerging markets equities, if you look at the declines in some emerging market currencies, they are completely out of scale. We were talking about an increase of less than 1 percent in the 10-year treasury yield from here. Less than 1 percent, there is no reason why stock markets around the world should see a significant drop in value or long-term investors should change their positioning dramatically because of that, in fact short-term interest rates in United States still are expected to move before 2015.

So, markets are vastly overreacting to this. This is the behavior of market participants to simply look at the playbook of what has happened in the past and make some knee-jerk decision to buy or sell some asset class because of what move in interest rate was suppose to mean. But they do not think through the fundamentals.

The fundamentals are the world’s biggest economies; the Untied states, Europe, Japan and China are all growing and if the world’s biggest economies are growing then it is good for emerging market economies. I think interest rates will go up generally but emerging market equities as well as developed country equities should do quite well in the scenario where the world economy is growing a bit better.

Q: Let me draw you to India-China debate, which dominates emerging market discussion or at least use to with incoming Chinese data the Purchasing Managers’ Index (PMI) data looking good. Does India look weaker in the emerging market basket?

A: I do not think so in the long run. Obviously, there is a huge problem right now with the rupee falling so dramatically recently and that is shaking confidence in India. However, what it also means is that Indian manufacturing will be more competitive. If the government and the central bank can stabilise the rupee when you look at the growth in Chinese wages versus the growth in India wages, this currency moves makes India a much more competitive emerging market for global business.

So, in the long run I would definitely be bullish on being invested in India as part of emerging market. They actually think that the increase in the value of the renminbi is making more of a case for emerging markets aside of China. With the global economy growing a little bit faster this year and next year. I think emerging markets in general do well and India also should participate in that particularly in the long run.