Mkts to rebound after agreement on fiscal cliff: JP Morgan

Concerns over the US fiscal cliff have been looming large of late. However, global markets are looking ahead as positive comments about tackling the issue have started to trickle in. David Kelly of JPMorgan Funds believes markets at the moment are very concerned over the fiscal cliff. But, he is hopeful of getting it fixed over the next few weeks or at the most, till January.

According to Kelly, markets will rebound once the agreement on the fiscal cliff is known. He also added that the US Federal Reserve may continue with quantitative easing for the moment, but as the economy improves it may not be extended any further. Also read: Petrified by the fiscal cliff? Relax, it's just a slope Here is the edited transcript of the interview on CNBC-TV18. Q: First to the US fiscal cliff which is the prime concern on everyone’s mind, what do you think is going to be the likely outcome of this ongoing tussle?
A: I think markets are very concerned right now about the idea that we will actually go over the fiscal cliff. It is important for investors to realize though that they have to come up with a deal. They may come up with a deal in December. Technically, we may actually have to wait until we have gone over the fiscal cliff in early January.
But, by the time we get to January, the amount of pressure that we put on Congress, not just for markets, but also from everybody who have seen taxes go up and from all those people who are seeing government contracts getting cancelled, the pressure will be overwhelming.
We strongly believe that Washington will deal with the fiscal cliff issue over the next few weeks or at the worst case over the next few months. And when they do, markets ought to rebound following that agreement. Q: How do you think it will tie in what the Fed’s approach may be going into the next year? Will they be as expensive as they have been?
A: We expect the Federal Reserve to continue for the moment with quantitative easing (QE) and indeed there are hints that they will further extend this policy by initiating outright purchases of treasuries once Operation Twist comes to an end. That I think will continue at least till 2013.
However in 2014, there will be a change in leadership for the Federal Reserve, it is very likely as Ben Bernanke is due to step down in January 2014. At that time, because of the improving economy we may see some relenting here.
Overall, we think the policy of QE is probably too expansionary in terms of money supply, given the state of the economy, which is after all improving. And as unemployment comes down, more and more members of Federal Reserve will be reluctant to extend QE further. Q: The big concern is the kind of collateral damage that the US markets may have to face, what is your view on the equity market set up there?
A: I don't think anybody should try and time markets in terms of days or weeks or months. We knew that the markets would get nervous about uncertainty about the fiscal cliff as we headed towards the end of the year. I think it is impossible to figure out the day to get out and the day to get in.
Long-term investors ought to remember they are long- term investors and the most important facts for long-term investors to recognize right now is that relative to bonds, US stocks are still very cheap. In the long run, as uncertainty dissipates both stock prices and interest rates ought to go up. That suggests people should be at minimum balance and preferably overweight equities and don't try and time this.
_PAGEBREAK_ Q: How would you broaden that in terms of an outcome you see for global equities given this entire fiscal cliff situation?
A: Nobody should be investing in stocks at all if they are investing in them for a few weeks. It is simply the wrong way to play this game. In general, we think global equities are cheap relative to fixed income and relative to cash and many other alternatives. If you are investing for the long run, we would recommend being overweight equities, particularly in US and in emerging markets (EMs). Q: The other big concern for the markets aside from what is happening in the US is the European situation, any worries that they may actually become the key concern in 2013? What did you read of Mario Draghi’s comments recently?
A: I think what Mario Draghi is really trying to say is that Europe's politicians need to get their act together and no country in Europe is an island. Germany has as much to lose from a slowdown in the European economy as anybody else. I think he is right.
The European Central Bank (ECB) is doing whatever they can do to protect the banking system which will protect sovereign debt. But, European leaders need to recognize that they have to transfer money from some of the countries that are doing a little bit better in Europe to the periphery and help those economies to grow, to stabilise the whole system.
It is like Benjamin Franklin many years ago said that we should either all hang together because if we don't, we will all hang separately. Right now, Europe is heading towards the same situation of everyone hanging separately. Q: On the point you were making about global equities, narrowing it down to EMs, what is your view on markets like India or the EM space? What kind of fund interest do you think these markets are drawing right now?
A: There will be flows going back to EMs as people are more willing to take on risk. The issue of when people are willing to take the risk I think depends to some extent on the fiscal cliff. That is one of the issues which will be decided over the next few weeks. As we get a resolution on that and global stock markets begin to move up again, I expect EMs will be a key beneficiary.