Expect global market consolidation in Oct: JPMorgan

Bullish on global equities, Andrew Economos, Head, Sovereign & Institutional Strategy Asia, JPMorgan AMC believes that after the massive rally across overseas markets, there will be some consolidation in September-October given the fairly heavy event calendar - both political and economic.
 
"We will see the S&P 500 using that (political and economic events) as a proxy for global equities and it is a fairly effective one given these high levels of co-relation. We should see anywhere from 5-6% going into the end of the year. We still have some upside on the S&P, which would translate into twice their performance in places like India, China and the rest of the emerging markets (EMs), notably the Asian ones," he said.

Speaking about India, Economos said the current slew of reforms are propping up Indian equities and getting investors globally to start refocusing on India. According to him, given the deadlock in politics and the fact that there were zero expectations around the same government, it was very easy for foreign investors to ignore India. "The market has bounced back, rupee looks good and with continued economic reform, confidence is coming back. It is actually pretty good for risk assets and India in general. I expect the market to muddle through and continue to trend higher," he added. Here is the edited transcript of the interview on CNBC-TV18. Q: Now that most of the global ammunition triggers have been played out by the central bankers, what is the next event that global market watchers should latch onto?
A: I think the current liquidity tsunami is part and parcel of what is keeping these markets afloat. But I think what is key is to see continued stability in the Eurozone. Moving into the end of September and then early mid-October, you will start to see the Spanish and Italian situation with respect to the Eurozone start to stabilize. You will also see leadership transition in China on October 10, which will be a big event. We are going to pay attention to that. Hopefully from India, we will get a series of continued reforms both political as well as economic which should keep investors interest focused on the region.
 
Q: How do you map the US market trajectory for the rest of 2012? Fund managers surveys indicate worries are mounting about the fiscal cliff situation and that may cause a sell off especially after the elections, how are you positioned on risk assets?
A: We are relatively constructive on risk assets in general. We are starting to think there is a move away from fixed income into equities. We think US stocks will be net beneficiaries of that as well. We are fairly constructive on risk assets but also on the real economy, it seems like the US is starting to improve, both on the housing front as well as a little bit of faint stories on domestic demand and consumption.
 
That said, we still have a very busy political agenda with the November elections. Of course, we have got this looming fiscal cliff, which we believe, is completely overstated. We think the American politicians, just like politicians all over the world, will do what they do the best, which is delay the inevitable and push this out as far as possible.
 
We don't believe the changes, both in terms of spending on the fiscal side and tax side, will come in all at once. It will be more of a gradual issue. As a result of it, the market should stay fairly buoyant through the end of the year.
 
Q: Slowdown news from Europe can be digested but now talks of slowdown in China are growing. Analysts are cutting China GDP forecast now to 7.5 per cent from at least 8-8.5 per cent. Is China just shifting one gear lower or is it heading for something deeper, maybe, even a crash?
A: I think the Chinese economy is starting to slow. But let us go back a step and let us look at the 12th 5-year plan and the Chinese policy makers told us quite clearly they were going to engineer slowdown from below 8% into the 7-7.5% GDP growth range. They did precisely that so we should not be in shock. Secondly, it is a very large economy, it is the second largest in the world right now.
 
As a result of it, it is moving to a very slower growth trajectory. But remember 6-7% for such a large economy is still a very good number. It does meet the demographic socio-political needs of China in terms of economic development, national development policy but also maintains fairly good profit growth for the Chinese companies. We think that there will be slower growth in China but still good enough to prop up earnings and support the stock market where we are starting to focus more of our attention.
_PAGEBREAK_
 
Q: Since you are bullish on global equities, what is the potential upside you are looking at from these levels?
A: It has been a terrific run. We should have some consolidation here in September-October as we talked about earlier. There will be a fairly heavy event calendar here - both political and economic. But we will see the S&P 500 using that as a proxy for global equities and it is a fairly effective one given these high levels of co-relation. We should see anywhere from 5-6% going into the end of the year. We still have some upside on the S&P, which would translate into twice their performance in places like India, China and the rest of the emerging markets (EMs), notably the Asian ones.
 
Q: Do you see more highs this year and which sectors appeal to you now? Would you invest money into the cyclical sectors or would you get into the infrastructure and power sectors, which have seen some kind of policy initiatives?
A: I think some of the economic reforms will lead us to be more constructive on power and infrastructure in general. They have been beaten down. But I think the good news is that we have finally politically broken Delhi deadlock. As a result, it looks like the coalition is really on board with the necessary changes that the government has to make in terms of reforms.
 
This means not only the subsidies getting reduced on the fuel side, which is good for electro-power generation amongst others, but also we are seeing liberalisation across some of the industries as well as privatisation. I think those are all good news and they are propping up Indian equities and getting investors globally to start refocusing on India.
 
Let us face it, given the deadlock we have had in politics and the fact that there were zero expectations around the same government, it was very easy for foreign investors to ignore India. The market has bounced back, rupee looks good and with continued economic reform, confidence is coming back. It is actually pretty good for risk assets and India in general. I expect the market to muddle through and continue to trend higher.
 
Q: How will you pan out or map the movement of the rupee as well as the euro because they sometimes move in steps?
A: The rupee makes much more sense than the Euro. The Euro is, of course, going to be hostage to a lot of headline risks whereas I think the rupee has found the lows and has started to move up. The big change in the rupee, as far as I am concerned, is this continued reform package. If that continues, I think that will boost our confidence.
 
But more of a shuttle shift to more Foreign Direct Investment flows should prop up the rupee. It is not going to be dramatic, we are not expecting things to explode to the upside. But again, it should have put a base at the 56 level and it should continue to trend a little bit higher.
 
I would expect rupee to be higher probably anywhere from 5-6% tracking the stock market in general while there is way too much volatility in the Euro. On one hand, as there is more and more confidence in the Eurozone and the resolution of the crises and the move into some kind of growth trajectory, that should be bullish for the Euro. On the other hand, Germany, the core as well as the periphery, want the Euro lower. It does help the whole adjustment process. I think we will see the Euro at about 130-132 and then probably hold there for a while.