Indian market to improve in 6-9 months: JPMorgan Sec

In an interview to CNBC-TV18, Sunil Garg of JPMorgan Securities said that in six-nine months from now, on the back of possible cut in interest rates by Reserve Bank of India (RBI) and better inflation data, there will be a lot more potential macro positives and hope for a better finish in the latter half of this year.

Speaking on the depreciating rupee, he said it will be a concern while attracting foreign institutional investor (FII) flows. Also, the inverted yield curve does not send out a good message too.

He placed his bets on non-banking financial companies (NBFC) and on public sector unit (PSU) banks despite ordinary results.

Also read:See room for only one more rate cut by RBI: JPMorgan

Below is the edited transcript of his interview on CNBC-TV18.

Q: Is it still risk-on for Asian markets or are you seeing only select markets getting the money from global investors now despite the very strong liquidity trends overseas?

A: We have had a very diverse performance across the region. We have been risk-on in some of the Southeast Asian countries like Thailand, Indonesia, Philippines and some of the larger markets like China and India have struggled to perform.

India more recently has obviously done very well and Korea has struggled to perform. We definitely are seeing a rotational bias in these markets right now. India is probably pausing a little bit for consolidation in short-term. China is looking like a trading bounce for now.

But if I extend the view maybe 6-9 months then definitely India has got a lot more potential macro positives. China has got some structural headwinds and that is how we expect these markets to trade. But in the short-term we definitely see a rotational bias.

Q: We have sucked in quite a bit of the near-term money over the last few weeks into India. Do you think the rupee might present a problem as despite that, it is trading at 52-week low this morning above 56. Do you see that presenting any kind of hurdle or do you see India continuing to attract these kind of flows?

A: That is a concern, because despite all the foreign institutional investor (FII) flows and some of the declines in commodity prices, the rupee has actually not responded. Even though the equities have been much stronger the currency has depreciated.

So at some point that does become a potential problem for foreign investors. The other area which is also worth looking at short-term is the yield curve which is inverted and is clearly not a very happy situation. Some of these are shorter term issues which will probably get resolved, but if it persists, yes it could be a problem for flows.

Q: Year to date (YTD), we are actually flat. So in terms of performance we have not done that much. Tactically for the second half of the year how would you approach India? What is the bias, for big gains, for flat market or some downside risk?

A: In the very short-term, we probably have downside risk simply because the earnings flow and some of the macro data is still going to remain weak.

But some of the fiscal consolidation that we have seen, some of the interest rate reductions, inflation coming off is setting up India for a better finish to the year, perhaps more towards the latter part of the second half.

That is how we would look at it and the bias to play this would certainly be with the financials.

The expectation is that the Reserve Bank of India (RBI) does have room increasingly to ease monetary policy further which then would favour the financials, initially the non-bank financials and the PSUs. But overall that is the construct that looks attractive to us.

_PAGEBREAK_

Q: What does that tie-in with central banks have for you in terms of expectations? Do you think a large part of this rally is going to be fed by monetary action rather than fiscal?

A: There has definitely been already some fiscal consolidation. As we have seen the reduction in oil subsidies with diesel prices going up. Reserve Bank of India (RBI) has cut rates a few times.

They have generally been hawkish in their stance, but if we see inflation coming off further, then monetary stimulus becomes a much bigger driver for growth opportunities which is also the reason for us to be favouring financials at this point.

Q: In financials which way are you leaning? Public sector banking results have been quite ordinary, but private sector bank stocks have expanded valuations considerably. What are your comfort pockets in India?

A: The obvious trade right now is non-banking financial companies (NBFC). As interest rates ease, they are bigger beneficiaries being more wholesale funded.

The results of the public sector units (PSU) banks have been ordinary, but if we look forward then a better rate environment helps them and we also start to see some asset quality pressures easing as well.

So the PSU banks definitely look attractive along with the NBFCs.