JPMorgan Funds bets on EM equities, expects a rebound

David Kelly, Chief Global Strategist, JPMorgan Funds expects Asian equities to rebound once US economy starts improving. Many emerging economies are grappling with domestic issues, but from a relative valuations perspective, emerging markets are not expensive, he said in an interview to CNBC-TV18.

Kelly is too optimistic on emerging market equities in the long-run. Meanwhile, one may see some short-term outflows from bond markets given that the US Federal Reserve will gradually pullback stimulus, but from a long-term perspective, interest rates in United States (US) are too low. "They (interest rates) are not appropriate for where the economy is. You will see some adjustment in the bond markets around the world to the fact that the Federal Reserve has to move to a less accommodative stance," he added. Below is the edited transcript of David Kelly’s interview with CNBC-TV18 Q: The immediate concern is with regards to what may happen with flows and whether there could be sharper outflows especially from the bond funds with specific reference to the emerging market space. Would you expect that to happen, a much more consistent outflow situation now? A: We might see some short-term outflows particularly from the bond markets, but this is the natural adjustment. The truth is that long-term interest rates in United States (US) are too low. They are not appropriate for where the economy is. To me the interesting part of what happened today is not so much the market reacted so strongly to what Ben Bernanke said, but why it did not react earlier? In the long-run the US economy is getting better and that will be healthy for Asian equities. So, Asian equities will rebound, although, you will see some adjustment in the bond markets around the world to the fact that the Federal Reserve has to move to a less accommodative stance. Q: What has been happening over the past few weeks though is that much of the global money seems to be getting into US equities, that is coming through in the Exchange-Traded Funds (ETF) data as well and it is moving out of emerging market products, which has put emerging market currencies and equities under a lot of stress. In the near-term, do you see that trend continuing? A: It may, but if you invest in equities you should invest with a long-run. There are problems in a number of emerging markets in local economies, but if one looks at relative valuations particularly in the equity markets, emerging markets are not expensive. Within the US, equity markets are cheaper than the bond markets, causing money to flow towards equities. In some ways it is a simple story in the world and that is what is causing this. But overall, I am pretty optimistic about emerging market equities for the long-run. Investors just need to be a little bit patient here.