Stay invested, diversify across asset classes: JPMorgan AMC

Global markets have consolidated for the past few days. In an interview to CNBC-TV18, Geoff Lewis, JPMorgan AMC says 2013 will be a better year in terms of the global economy showing gradual improvement. "Returns will probably be somewhat less than in 2012, but they will still be much better than in cash or in government bonds," he adds.

He advises investors to stay invested, but diversify across asset classes.

Also read: Emerging markets are still very cheap, says Ashmore Investments   

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar.

Q: What’s the call now on the equity markets?

A: I think we have had some better economic data. We had strong retail sales in September, 1.1 percent, prior months revised up and consumer spending on track for 2 percent real gain in the third quarter.

On the other hand, I think we saw the weakness in core durable goods order. So investment spending could be a bit weak. So, really we are thinking that US growth will be pretty sluggish in the third quarter, but might gradually improve in fourth quarter as long as the politicians get their act together and come to a reasonable compromise.

I am still worried over the US fiscal cliff. It is quite a difficult thing to decide. It is an irrational policy choice, but sometimes accidents happen if both sides take it right to the brink. So, that, in my mind, makes this quite a difficult point in time to predict markets. There is a lot of uncertainty there that is being created unfortunately by poor policymaking in Washington.

Q: How would you expect smart money to move? Does it shy away of equities? Does smart money stay put with equities, especially developed market equities?

A: I think probably we are seeing enough signs of improvement now in things like US housing sector and in the economy generally. It is quite gradual. As long as we can get through this fiscal cliff then I think we are set for probably a better year in terms of the global economy showing gradual improvement.

I think we are pretty much at the bottom now. That applies to a lot of the Asian economies also. So, 2013 will be a better year. From that point of view, I think the advice will be to stay invested, but diversify across asset classes.

Q: What about emerging market equities, particularly India?

A: Emerging markets have done poorly this year. I think one reason for that is everybody underestimated the degree to which the slowdown in Europe would actually hurt the exporting, manufacturing centered Asian economies. The slowdown has been much greater. Now, we are looking at numbers like 2.5 percent GDP growth for Korea, 2 percent for Taiwan, 1.5 percent for Hong Kong for this year. So, they really have been hurt quite significantly.

But as long as Europe now is stabilising and if the US can manage to do a little bit better and China has its soft landing then I think six months from now the fiscal cliff will be behind us. The point of maximum policy uncertainty will be behind us. We will see more money flowing back again into the emerging market economies.

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Q: What about India itself? The amount of money in August-September and even the first half of October have been fairly decent. Do you see that continuing or do you think that now perhaps concerns will come-in in terms of valuations?

A: I think the amount of money that has been coming into India as a share of international portfolio capital flows has been pretty decent over the last 10 years. I think what surprised a lot of people is at the middle of last year, when we had bad news for India, the policy paralysis and the weakness in the currency, that very little money actually flowed out. So, I think when a lot of investors look at the China business model, they can see some potential problems further out.

When people look at the slower growth in Indian business model, they are more confident that this is a model which works over the longer term with less need for major structural reforms. This might be a reason why maybe 5-5.5 percent growth in India still looks very attractive to them.

Q: Your base case scenario is that in general the global equities are likely to consolidate till year-end and then the next year 2013 will be a better year for equities, right?

A: Our base case scenario, for global markets, for 2013, our high conviction case if you like, which we attach an 80 percent subjective probability, to is the continuation of this kind of muddle through. Is the glass half empty, is the glass half full? So, it is going to be a continuation of difficult market. But perhaps the peaks in risk aversion will be somewhat lower. There will be more signs certainly in the US economy that recovery is gradually strengthening. This is a favourable environment for equities.

Surprised by strong returns this year, I don’t think we should expect the markets to be quite as generous in rewarding investors next year. So, returns will probably be somewhat less than in 2012, but they will still be much better than in cash or in government bonds.