Fed stance on stimulus reassuring; buy on dips: JP Morgan

Investors should get over their obsession with interest rates and focus on the developments in the economy, feels Adrian Mowat of JP Morgan. US Federal Reserve chairman Ben Bernanke Wednesday spoke in favour of continuing with a easy monetary policy, saying a premature tightening of interest rates would hurt economic recovery in the US.

Mowat said there was unlikely to be any significant change in global liquidity because of the Fed's commitment to quantitative easing. Commodity prices have weakened over the last month, and stocks have gained sharply on hopes that the Fed would start reducing its bond buying programme as the US economy was showing signs of recovery. According to Mowat, the Fed's stance on continuing with the stimulus is reassuring as a recovery in the US economy would be positive for emerging markets as well. Mowat said investors should not over react to Bernanke's decision to persist with an easy monetary policy. Mowat said equity market investors are nervous after a sharp rally over the last month. He, however, would be a buyer at every decline. Below is the edited transcript of Mowat's interview to CNBC-TV18. Q: What did you make of the market reaction to the Fed minutes yesterday? Do you think there could be a bit liquidity scare in the near term, which might trigger off what many people might think, would be an overdue correction? A: I do not think the market knows what they want at the moment. If the long-term interest rates move higher, because growth is better, then that is good for equities. However, higher interest rates aren’t necessarily good for equity. We should focus much more if the economy is better. That will have much more powerful, more sustained effect on equity markets. What is the Fed saying about the moves in the interest rates, it is saying that if the economy requires more quantitative easing (QE), then they will provide more QE, maybe even more than USD 5 billion a month that is currently going on. If the economy does not require it then they will take back the QE. If I were to invest, I would find that reassuring rather than something that oscillates around. The US capital markets have had an extremely good start for the year. Falling by one percent after so many days rise isn’t really that significant event. Q: What kind of ramifications does it have for emerging markets like ours where the most powerful force has been liquidity through the course of the last few weeks? A: I don’t think there is any real change in the monetary environment. It is important to be specific about what’s going on. The Federal Reserve has provided a lot of clarity in the price of short-term money and maybe will keep a zero interest rate policy till until unemployment is below 6.5 percent and they are convinced that it will stay there. That probably means that we have short term interest rates at zero, remain zero well into 2015. The debate is around the amount mentioned in the bond markets that the Fed is doing. If the Fed is in a situation where it feels it is appropriate if the QE actually finishes this year, then I think that’s quite bullish. It should be positive for emerging markets which then can have a beta to global growth. The other thing to think about is growth. The credit growth in the emerging market could actually narrow if people become more confident in growth. That would partly offset the increase in US treasury rate. One can make the same argument for the corporate sector. So my point to investors is - don’t over react to the news. I don’t see as of now an environment that changes the price of money and the mood for capital added low risk assets. Q: Tactically, would you prime yourself for a bit of a cut, something people have called for in the second half of May or do you think the approach should still be to buy the dips on markets? A: I think we are seeing the emerging market rotation building. The Mexican market is having a powerful move up until April. It lost all that gain in very short period of time. We saw Chinese utility being hit hard this week. They had done very well yesterday. So, I do think investors are a little bit nervous after the rally. They think that Europe may unwind a bit. So, I would imagine in near-term that the market pullbacks a little bit with the rotation out of the EMs. Once it runs its course, I will be a buyer on those dips.