EU risks remain; Indian bourses to move sideways: JP Morgan

Andrew Economos, JPMorgan AMC explains on CNBC-TV18 that the European crisis is still a concern but the situation may turn positive at the end of the first half of the current year 2013. Economos continues to see sideways movements in the Indian markets and adds that liquidity will continue to be ample in the global economic system.

Below is the edited transcript of the analysis on CNBC-TV18 Q: What is your call on the first half of the year regarding the markets on which you are tactically overweight on and positions you are cutting across Asia?
A: The first half of 2013 is going to be dominated by equities. So at the first-level of risk our focus is more on equities in fixed income. And within the equity space, we have adopted a barbell approach with focus on US equities and emerging market (EM) equities along with trading opportunities within Japan and continental Europe.
The approach is risk-on and much more constructive going into the first half after which we are going to wait and see whether the slowdown in growth that is most anticipated kicks in. We think, though it is highly unlikely, there will be a nice run up into June before growth pauses and waits for the next big signal from the marketplace. Q: There was widespread belief at the start of the year that some of Europe's tail risks had significantly diminished. But in the last 48-hours rising Spanish and Italian bond yields have raised concerns about Europe. Do you see Europe's risks returning to trouble the global economy in the foreseeable future?
A: Europe never left the table as a risk. The region’s debt has just been backstopped by the ECB. So there will be occasional flare-ups from Europe either from Greece, the Spanish or the Italians as they work through this process of very extraneous austerity and adjustment. It is not going to be easy for the Europeans and they will continue to see some bad news on that front.
The real flare-ups have come from the political front where Silvio Berlusconi in Italy is trending nicely in the polls, Monti, Mario Draghi and Mariano Rojoy are under pressure. But I think they are momentary blips in the market and some gradual improvement should start which I think is much more critical. Q: How do you regard markets like India for this year where the stance has changed to a reasonably overweight after the outperformance of 2012?
A: India had a nice run and that was in anticipation of some good news which is starting to see trickle in. I think the Reserve Bank of India (RBI) cuts recently are an indication that the central bank has realised that the economy was slowing down and needed liquidity even though it wanted to keep the pressure on the politicians.
The Indian equity market will continue to see a sideways move with occasional rallies sans big mid-year moves like as expected in the US and in other emerging markets notably because there are still good fixed income alternatives in India. Q: When you say you expect a pause in June, what do you think it would amount to, for the markets? Are you looking for a sharp summer correction or a gentle drift?
A: I think there needs to be a sell-off because by then the markets will be technically overbought and there will be some multiple expansion. So as a result the valuations will not be as reasonable along with a bit of expected faltering in economic growth to effectively cause a mid-cycle correction.
So I do not think it is going to be anything unique but it is enough to pull the markets back and enough to encourage some profit-taking. Investors can then prepare for a very good last quarter across most risk markets, the US market in particular. Generally, a risk-on approach is the right perspective to adopt. Q: What do you think is happening with liquidity because there are a lot of funds coming into markets like India have been raise afresh? Do you expect that to happen through the course of the next few months?
A: Liquidity is the financial heroin and the system has been adequately injected with the drug by central bankers. So liquidity is ample and it is going to continue to be aplenty as central bankers assure of maintaining low interest rates for much longer than anticipated.
In fact, by 2015 the Fed will start getting concerned about inflation so there will be plenty of liquidity. It may not necessarily be funds raised afresh or funds routed out of fixed income, but funds that have been on the sidelines. There is a lot of cash in the system.
In fact, I have never seen this much cash in household balance-sheets, corporate balance-sheets, on reserve with central banks as well as within governments. So this ample liquidity is just going to find its way as central bankers force markets into higher-yielding assets and more risk-taking. Q: Are money managers in the US reporting of the big shift from bond to equity funds?
A: The US economy is complex due to the deleveraging in pension funds and insurance sector on regulatory changes and risk-based capital concerns along with banks taken down a lot of leverage. So, the central banking system is not what it used to be but within the long-money space, mutual funds and some of the more-active longer-term alternatives such as  long-short equity funds move to a more risk-taking approach and move more into equities.
So, yes, there is some shift and some rotation out of fixed income within the macro-managers and within the large asset allocators. We are starting to see a move into equities in the hedge-fund space.