EMs to falter in Q1; may revive later in 2013: JPMorgan AMC

It is difficult to see emerging markets (EMs) gaining some ground as outlook on companies’ earnings is negative, says Geoff Lewis of JPMorgan AMC. He told CNBC-TV18 in an interview that EMs may be stabilising but lack real signs of recovery. 

However, he is hopeful of inflows returning to EMs in the closing days of the year when investors would be keen to cash in on higher risks and beta assets. India may see inflows coming back later, he adds. He expects the rupee to decline further. He sees the export led growth in EMs struggling for the next six to nine months. It will be due to the trend of contraction in exports. China’s export numbers had shown a dip of 3.1 percent in June. Speaking on US economy, he says that the fiscal drag will be fading and the economy is set to be more vibrant and stronger. The minutes from the Federal Open Market Committee (FOMC) meeting may upset the market for some time, he adds. Also read: This is worst bear market in living memory: Antique's Doshi Below is the edited transcript of his interview to CNBC-TV18. Q: What is the sense you are getting? We have seen this decoupling of emerging markets (EMs) from the United States (US) mother markets. Is it continuing to be a trend where the US will continue to do well and the EMs will languish as money gets pulled off? Is that trend likely to play for some more time? A: It is difficult to see EMs really making up some of the lost ground until we see a much clearer outlook on the earnings front. Unfortunately, the earnings momentum; the ratio of upgrades to downgrades is still in negative territory for the EMs. There are some signs of stabilising a little bit, but there are no real signs of recovery. So, the fiscal drag will fade in the US, and the economy will become more vibrant and stronger. Hopefully, that will be the catalyst for investors to return to higher risk, higher beta assets later in the closing sessions of the year. That will be sufficient to trigger a rally in EM, which we believe are oversold. Q: How big is the outcome of the Federal Open Market Committee (FOMC) minutes going to be for the markets? A) What is the market currently pricing in? B) What are you expecting? Is it going to move the markets like the jobs data did last Friday? A: All eyes are going to be on the FOMC minutes. They are going to be a lot more important than they usually are. There is possibly a scope for a little bit of an upset. A little bit of volatility; if they reveal say a majority of the FOMC members are inclined to be hawkish and have said so and that would cement the idea that we will see the start of tapering in September. That could cause a little bit of an upset. But looking at the amount of money that is being pulled out, high yield bonds has been pulled out of mortgage Real Estate Investment Trust (REITs). We have had the big wave of the carry trade unwinding. So, a little bit of volatility will be seen. But nothing like the shocks and the brutal repositioning effects that we saw after Bernanke's May 22 remarks. _PAGEBREAK_ Q: Your expectation is that by the end of the year EMs will be beginning to start seeing flows. What is the pecking order? Would it be countries that are more exposed to US or more export-oriented? Is the inherent economic strength of the economy that investors would for? Is it just an EM basket that will start getting money? A: Some of the foreign investor inflows that we had year-to-date (YTD), suddenly disappeared in June. We are basically back to a net zero balance. Upto that point, 80 percent of the money had been going to India and much less to the other markets. Japan now obviously is more of a competitor. We have seen strong inflows from foreign institutional investors (FIIs) there. So, also with the short-term outlook now with these new China concerns, I don’t think we are going to see massive inflows. We will start to see a trickle back. It is rather difficult to say in which direction they would be. But I would not be surprised to see India again receiving a majority. Q: What did you make of China trade data particularly on the export side, which has shown a contraction for the first time since January 2012? What is it suggesting with respect to global growth? Is the demand weakness is going to be a lot more acute than what the market had earlier expected? A: The Chinese trade data is still suffering from the distortion when there was a round-tripping and you had short-term money coming in. It was muddying the picture, particularly through the data for Chinese exports to Hong Kong. But if you take that out, the picture is still looking relatively weak. So, this would be consistent with the weak trade data that we had from Korea; the bellwether for regional data, which also showed a negative year-on-year figure. So EMs are not going to see a strong helping hand from exports from the global economy. The US is still suffering from the fiscal drag. We have seen early signs of consolidation and stabilisation in Europe. But it is not going to be a rebounding market for Asian exporters. So, what this means is that EMs will struggle to improve their growth performance over probably the next 6-9 months. Q: What is your take on the rupee? I know it is notoriously difficult to call. But your comment on EMs was they have largely been oversold. Would that go for the rupee too? A: The rupee is certainly looking cheap now on a real effective exchange rate basis. The sell off in May and June was basically across the board. But it was heaviest in those EMs like India, which have twin deficits – fiscal and current account, external deficits. Similar moves in Turkey, Brazil for example were seen. So, I don’t think the rupee’s move was particularly exceptional from that point of view. The rupee will stay relatively weak in the months ahead. But not to have a another major letdown at this point. Q: I know  your asset allocation includes responsibilities of investing in gold as well. Do you see further downfalls in gold? A: Basically, one of the main reasons for the fall of gold is that it has just got so overbought previously. Investors had got less concerned about inflation. We have had four years now of aggressive monetary easing and no real sign of inflation at all. So, perhaps they were no longer looking on gold as such an unimportant asset to have in the portfolio as an inflation hedge. So, I am not too optimistic on gold and on commodities too. They are going to remain quite weak and probably will see a bit of further price weakness particularly if China is now growing more like 6.5-7 percent rather than a 7.5-8 percent.