Asian mkt attractive; US may see consolidation: JP Morgan

The US fiscal cliff has worried global markets for quite some time and Tai Hui of JP Morgan Asset Management feels there may be some pressure on the market further to the debt ceiling issue. He believes the US may see a bit of a consolidation in terms of stock market momentum. Besides, he is also not ruling out some short-term volatility in markets around the world.

Hui is also optimistic about Asian equities and believes valuations of many of the markets in Asia, particularly China, India, Japan and other countries in north-east Asia look quite attractive. Therefore, it is a good time to enter equity markets in Asia, he advised. Here is the edited transcript of the interview on CNBC-TV18 Q: There is some circumspection about how markets may move through the February-March period, which is when newsflow gets quite tense for the United States (US) economy. What’s your own expectation? Are you guys expecting to see quite a bit of pressure on global markets or do you think we will tire through? A: I do think there are a number of areas where we could see pressure further to the fiscal debt ceiling in the US. First of all, we have had a very strong momentum since the end of 2012 and the first half of January 2013. Therefore, I think there maybe some degree of consolidation in terms of the stock market momentum. Of course in the recent days we are starting to hear a little bit more noise about currency valuation, both coming out from Europe as well as from Japan. As a result of that it may also create some degree of market volatility in the very short-term. Q: What are you advising clients to do with respect to Asian equities and what could the general trend look like in the first part of 2013? A: I am somewhat optimistic in terms of Asian equities in the first half of 2013 on a number of factors. First of all, valuation in many of the markets in Asia, in particular China, India, Japan and also north-east Asia is very attractive. It is below the long-term trend in both price-earnings (PE) or price-to-book (PB) basis. Secondly, we are seeing a pick up in the economic momentum in China. I think that’s a very important sign or signal to enter into the equity markets not only in China, but also in north east Asia. I think for Japan, we do see a lot of policy pledge from the new government, from the Abe administration. But, I think we need to see more carry through, more execution of such policies by both the government and the Bank of Japan in order for the rally to be sustained. Q: What do you think the quantum of the damage for equity markets could be through the February-March period? Would it be limited to a 5 to 7 percent correction or could it be something deeper? A: I think that will very much depend on the outcome of the fiscal cliff discussion between the Congress and the White House. The reality is that there are very few options for the Congress, except to lift the debt ceiling for the US federal government. But, the question is how much of that sequestration or the ultimate expanding cuts would take place in the US. I would expect the correction in the US to be somewhat limited and in particular, if you look at some of the underlying economic fundamentals in the US such as the housing market, such as the restoration of household wealth, all of this is actually in a very positive light for the medium-term growth of the US market. My view is that the US economy will face more of a headwind in the first half, but from the second half onwards once we see more clarification on the government’s balance or the fiscal position that should help to improve the growth prospects of the US economy. _PAGEBREAK_ Q: The standard feature for markets such as ours in Asia has been the kind of flows that we have been pulling on a monthly basis. What do you hear in terms of liquidity interest in Asia and is that the reason you are expecting to see outperformance or is this a growth-based call on Asian markets? A: Capital flow definitely is a very important factor when driving relative performance in Asia and as you rightly pointed out, we have seen steady inflow into both India as well Asia for the past few quarters. And I think we will continue to see the inflow for a number of reasons. First of all the Fed, the European Central Bank (ECB), the Bank of Japan (BOJ) – all of them maintain incredibly accommodative monetary policies. That is unlikely to change anytime soon. So, the liquidity environment will remain hugely ample. Secondly, whether investors are looking for return? Clearly, they are looking for both growth as well as fiscal health and that again provides Asia with a very attractive backdrop when it comes to capital flows. I think over the course of 2013, I am still expecting steady inflows coming into Asia both into India as well as elsewhere and that should be one of the reasons which is underpinning our optimism on the Asian markets. Q: One of the biggest worries for the Reserve Bank of India (RBI) has been the movement on the rupee. Despite a huge chunk of flows coming in like you alluded to, there has been no substantial recovery that we have seen in the currency. How do you see the trajectory of the rupee in the first half of 2013? A: I think the rupee is going to be pulled in two directions by opposite forces, as you rightly pointed out, the equities on one side and to some extent they will expect an inflow into the bond markets from international investors that should be rupee supportive. However, as we all know, India has always had a persistent current account deficit (CAD) and that is likely to remain quite significant in 2013. In that sense, I think at least for the first half it will be a tug of war between the CAD as well as the inflows coming into India. I am expecting perhaps a relative rupee, but if we do see for example oil price spike because of geopolitical tension in the Middle East, that may well put more downward pressure on the rupee in the near-term. That is definitely a risk to watch out for.