JPMorgan AMC sees strong dollar, long-term value in rupee

In an interview to CNBC-TV18, Richard Titherington, CIO & Head-EM Equity at JP Morgan AMC spoke about on expected lines US election results and how the focus has now shifted entirely to the fiscal issues. Will the congress be able to strike a deficit deal thereby averting a fiscal crisis by the end of the year.

The emerging markets (EMs) equities will continue to be attractively priced, and the new leadership in China will be positive for the EM economy. "As Chinese economy recovers and we move into a new political environment with new leadership in China, it will be a positive locomotive for the rest of the EM story and I would expect India to participate in it," he adds. Below is an edited transcript of Richard Titherington's interview on CNBC-TV18. Q: The big question relates to the US election outcome and the fiscal cliff. Do you think the issue will get resolved or will become a protracted negotiation?
A: Clearly, now that the elections are out of the way, all the tension is on the fiscal cliff. My assumption is really the same for the markets in general; some form of compromise will be reached. Failure to reach a compromise will be very serious. It is likely that politicians will continue to talk till the last moment, but I am expecting a compromise to be reached. Q: How big is the risk of sovereign downgrade by rating agencies, if the US slips into a recession and fails to address the fiscal cliff issue by the end of the year?
A: The chances of a further sovereign downgrade are quite small. I am not very worried about it because as we saw with the first downgrade, the markets reaction was pretty benign. So it is not something, I am really worried about. Q: What about the negative equity market reaction in the US, the S&P is down close to 8 percent in the last two months? Do you think all that has played out and would you advice a buy into this dip in general?
A: The reaction of US equity market was understandable in the sense that the re-election of Obama means no change. US equities have performed well over the past 12-18 months. There is a certain disconnect between the bond market which is expecting a pretty low economic growth and an equity market which is pricing in economic recovery.
So, certainly you have seen the best performance in the US equities and are likely to see more in the near term. In terms of global equities, the valuations are still quite attractive; obviously there are issues particularly in Europe and Japan. But barring a big negative surprise around either the Euro Zone or fiscal cliff, I am broadly speaking constructive on the outlook for equities. Q: How worried are you about Europe rearing its head again next year? Right now the focus remains on the fiscal cliff, but do you think that may become a bigger problem to deal with for global markets?
A: The European economy is likely to grow slowly for sometime. The ECB is going to prevent a collapse in the banking system which is the most worrying outcome for the global economy and global investors. But I don't see Europe returning to its growth path of 1990s and early 2000s for sometime. And whilst that is not positive for the global economy, I don't think it significantly undermines the attraction of EMs, not the EM growth story. Q: How do you think emerging market space will standout in 2013? What is your approach there?
A: Emerging markets equities continue to be attractively priced. You are seeing a turnaround in China, both from an economic and stock market standpoint which I have been expecting for sometime. China is a bellwether for broader EMs. As Chinese economy recovers and we move into a new political environment with new leadership in China, it will be a positive locomotive for the rest of the EM story and I would expect India to participate in it. Q: What kind of movement do you expect to see in dollar because that’s tide in with emerging market performance?
A: Given the issues that Europe and Japan are facing, it is likely that dollar is going to trade on the strong side rather than the weak side. From an EM perspective, the commodity related currencies remain a bit expensive against the dollar. So, I would remain a bit cautious about the outlook there. But some of the Asian currencies and particularly the Indian rupee are good valued and whilst in the short-term they could come under some pressure, in the long-term, they offer attractive value for international investors.