QE tapering scale to be light; EMs attractive: JPMorgan AMC

Global market analysts believe that emerging markets (EMs) may already have factored in fears of tapering the quantitative easing by the US Federal Reserve. Andrew Economos of JPMorgan AMC says that EMs will wait for two events; Bernanke successor and the intensity of QE tapering.

In an interview to CNBC-TV18, he adds that the scale of reduction in the QE programme will be lighter and that the central bank will still continue to buy every month. He also feels that EMs have started to look attractive for investments. Sovereign institutions have started taking EMs very seriously again, Economos adds. Also read: Forget $, Re 1 = 1.5 cents. We need a New Rupee for India Below is the edited transcript of his interview to CNBC-TV18. Q: How much of tapering has been factored in by the emerging markets (EMs)? How much more to go? A: At some point, the market has factored in some, but not all of this. They are waiting for are two key messages from the Federal Reserve (Fed). (i) Who is going to replace Bernanke and (ii) what kind and to what extent is the tapering going to be? What is the asset mix of that tapering going to look like? It is going to be a taper light. We will see much less than the market anticipates because the underlying economic data is still relatively fragile. There is a bit of discord between the Fed governor as to whether or not the economy is too hot or too cold. The Fed has painted itself into a corner. They need to come out with an announcement at September 17 meeting and it probably will be some action but not as much as the government anticipates. They are continuing purchases; they are just scaling back the amount of purchase. So they are still in the market buying. Q: How would you value EMs? There is something to be said in terms of exports stimuli coming from improved OECD economy performance. The currency gives a leg up to exports. Is all that making the story better than what it was some time back? Or does it have to get cheaper before people will buy? A: The follow-on from that Fed argument is obviously liquidity will be plentiful. It is not just the Fed, it is other central banker acting in unprecedented easing and liquidity with exception probably the ECB drag he was just been talking of liquidity. That is positive in terms of fund flows. There is also a valuation argument as to transaction away from developed markets into the EMs. Some of the sovereigns institutions are starting to take a very serious look at EMs both valuations and mean reversion. We are going to get a very good buying opportunity for equities here in the next few months and we should see emerging markets start to catch a little bit of the tailwind going into that rally. Q: Indian market is down 20 percent on the index year-to-date (YTD) in dollar terms. The broader markets have collapsed. We haven't yet seen big outflow from FIIs. May be at this point there is absolutely no point for FIIs to sell with this kind of double whammy; markets and currency having fallen. Is that the reason we haven't seen too much of outflows? Or is it because there is not enough liquidity in the Indian markets? A: This has been systemic. I would be reluctant to just single out India. We have seen market and currency sell off across EMs from Latin America to Asia to East and South Asia. So this is happening across EMs. There is a very sound argument in terms of mean reversion to start moving back into the EMs at the expense of developed markets. Some market and asset rotators are beginning to do so. We are seeing increased interest in EMs from very sophisticated clients who now think that this may be a buying opportunity both in terms of currency as well as in terms of the equity markets themselves. We have technically oversold markets and are due for a bounce; that makes sense. Whether or not this becomes sustainable in India is whether we continue to see some economic reforms. Number two, whether or not we start to see the earnings come through, I would argue the earnings don't come through unless we see the economic reforms and the government has to tone down populism and move more towards privatization, liberalization which they have been reluctant to do. _PAGEBREAK_ Q: Looking forward into the calendar year 2014, clearly money is going to go away. We are seeing a spring in the step delta that developed markets are giving and it is still slowing in India. So do you think that even if we see bit of value buying here there isn’t a case for sustained growth or is there? A: There is a case for sustained growth and it is going to be a relative gain because the US is not going to continue to recover as rapidly as it has been in the last few quarters. Obviously the wealth effect is taken hold, property prices have recovered and also Europe is still undergoing structural reforms. There has been a technical bounce there in the euro. But at the same time the ECB is not flooded with liquidity. So EMs will catch more than a bit, I think there is a good fundamental argument they get it because we are starting to understand that secular growth rates may be coming down in places like India and China or the EMs complex but they are still better relative to developed markets.