Focus on year-end rally; India hot on FII plate: JP Morgan

JPMorgan AMC's Geoff Lewis explains to CNBC-TV18 that Europe is watching if Spain will bite the bullet and accept the bailout with the attendant terms and conditions. He adds that it would be a relief for the market if it focused on macro-economic data rather than responding to policy debates.

Lewis highlights the long-term FII interest on India by pointing out that over the last 15 years, India has attracted about 20 percent of the FII investment in emerging markets.

Below is a transcript of the analysis on CNBC-TV18.

Q: The European markets have come off somewhat. There has been slight profit taking across the market. Where do you think is the next road? Do you see this profit-booking continue or will the market keep finding support at lower levels?

A: I think the market is watching whether Spain will actually ask for a bailout and show willingness to sign a memorandum of understanding or if it will continue to press for a bailout and an enhanced credit line. This is causing some concerns because there is a bit of delay in just how much aid the ECB, the ESM and the ESFS will then extend to Spain.

So, this was expected. I don’t think the conditions for an immediate agreement to a debt bailout by Spain were ever specified or implemented. If Spain had inked a debt bailout, the pressure on Italy would have reduced considerably.

Next week is choc-a-bloc with events like the Spanish Budget, the French Budget and the announcement of the actual mechanism of the ESM. But none of them are really going to get back the tail risk. We are not going to see return of the real market riot that we saw in late June or last October.

Q: On Monday, the IFO data from Germany indicated weakness which was of course a reflection of the GDP. Of late, data from the US has also not been too encouraging. What do you make of these data and are they now the primary drivers of the markets?

A: I think it would almost be a relief in a return to a more economic situation if the markets were to focus on the macro-economic data and less on every twist and turn in the policy debate. It is macro-policy uncertainty that has been troubling markets globally.

Unfortunately, the German data suggests that German economy is now weakening and none of the data coming out of Europe is likely to start any surprises on the upside for quite some time.

Indeed the risks are probably on the downside with regards to the consensus forecast which is still a relatively mild euro-zone recession with, maybe a decline in GDP growth of a half-a-percent this year and offset by another half-a-percent rebound next year.

That is a pretty mild recession on the risks with the banking sector cutting back and shedding assets, but it could turn a little worse than this. So, though the data will be in focus, it is unlikely to please investors.

Q: Do you think the slowdown has hampered the developed market rally and the effectiveness of the QE3 liquidity has been played out?

A: It is hard to generalise from QE, though QE1 and QE2 set precedence, the circumstances were quite different. Those rallies lasted for quite a few months, though one was the rebound from a low point in 2009. I think at this stage, as the market goes into year-end, there will be some investors trying to lock-in some profits. But there will be a lot of investors who have missed out on the markets’ position.

After all it has been pretty light and funds have been flowing out of equities and into bond funds which now I think investors will want to maybe see, if they can gain in a year-end rally.

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So my belief will be that if some of the data holds up reasonably well and continues to show some progress in the US and does not get any worse in Europe, we will be seeing further gains in the markets going into year-end, I would not want to be out of the markets at this point.

Q: How is India being viewed? We have benefited from the global liquidity rush, but recently we have seen some important decisions being taken even internally. Do you think we are setting ourselves up for further outperformance?

A: I think long-term money has never really fled India. If you look at the experience over the last 15 years then India has attracted about 20 percent of the FII money going into emerging markets, much larger than its share in the MSCI-EM Index.

I think the relative attraction of India for longer-term investors still there. You don't have concerns from US hedge funds and other institutional investors over India landing hard, as there is in the case of China.

So that is something which explains the relative strength of India which has been the top performing large market in Asia this year, up 21% year-to-date versus 12% for the MSCI-Regional Index.

So, the steps that have been taken are certainly a move in the right direction, they suggest that policy paralysis is now behind us and this government particularly with Chidambaram as finance minister has finally found its footing at last.

Q: The market has reacted to some of these reforms with quite a bit of upside. Do you see further gains for India for the rest of the year?

A: The rest of the year is quite a short-period. I am always a bit wary of forecasting short-term movements. But one thing I noted was the downgrades to earnings now seem to be now severe in India's case. Over the last three months they are down about 2-2.5 percent compared to the rest of the region, where earnings have been cut by 4 percent for 2012, 6 percent for 2013.

So again on this basis, it looks as if India is starting to stabilise in terms of the earnings outlook, ahead of some other Asian economies and that also would be a reason to be reasonably optimistic about India’s prospects going into the end of the year.

Q: How much would you allocate in terms of wealth to commodities, precious metals and crude?

A: Precious metals are seen as an inflation hedge and the more QE there is, the more people will look to gold rather than fiat currencies. We are quite optimistic on the outlook on gold. Gold is a commodity that we like in this environment which is going to be with us for sometime.

Oil is rather different. We think that the strength this year was more related to geopolitical concerns on Iran and Israel in the Middle East rather than any shortage of physical oil in the market. So I’m not very concerned about oil.

I think Saudi Arabia is also doing a good job of supplying the market whenever there is sign of a temporary shortage. So I would expect oil prices to weaken a bit and then maybe to move up gradually in the course of next year.