Adrian Mowat of JPMorgan believes China is far from being in recession. He bases his argument on the strong data coming out of the country that shows that auto sales have risen 8% and home sales are up 20% this year
After Brazil's investment-grade credit rating was lowered to 'junk' status by Standard & Poor's, Adrian Mowat, chief Asian and emerging market equity strategist at JPMorgan, says the market has been talking about Brazil's downgrade for many months now and there is in fact still a possibility of more devaluation of the Brazilian Real.
He adds there is also a risk of more downgrades to emerging markets' growth.
The newsmaker over the past few months has been China and Mowat believes the country is far from being in recession. He bases his argument on the strong data coming out of China that shows that auto sales have risen 8 percent and home sales are up 20 percent this year.
As far as India is concerned, he does not think it will fall as much as other emerging markets. He is bullish on private sector banks.
Mowat in fact believes that the fall in stock markets presents a good buying opportunity in emerging markets.
Below is the verbatim transcript of Adrian Mowat's interview with Latha Venkatesh, Sonia Shenoy & Anuj Singhal on CNBC-TV18.
Latha: The overnight news that we have got, looks extremely depressing, Brazil downgraded to junk status, S&P also downgrading gross domestic product (GDP) forecast for the entire Asia pack region, machinery orders in Japan, the producer price index (PPI) in China. Are we going to see much more downgrades to global growth itself?
A: There might be some risk to further downgrades to global growth particularly emerging market growth although that has been the trend for a period of time and we have very weak global trade with Chinese imports down something like 14 percent year-to-date, but it's very important to remember here that we are in equity markets which are forward looking; we have seen a correction of around 30 percent in emerging market equities since April highs - that's a very large correction even in an asset class that's quite volatile. So we are already pricing in a pretty bearish outlook and what we are going to see over the next couple of months is some stabilisation in data. We had a very sharp rally in car companies in China yesterday, the auto production numbers came in around flat, they were expected to be down.
There was a perception out there that the Chinese economy is in recession, year-to-date and car sales as measured by registration is up about 8 percent. It doesn't feels like a recession in the world's biggest auto market. We are seeing home sales in China 20 percent plus year-over-year and that is a story of better affordability, mortgage rates have come down, prepayment requirements are down and houses prices have adjusted relative to household income. We have got very good order inflows into the Chinese construction companies at the moment, in the first half of this year there was quite significant fiscal under spending and so the tone of market which seems to be incredibly bearish on the macroeconomic environment, which you can only understand judging by historical data looking forward that probably moves in the right direction.
However, with regards to Brazil's downgrade, this is something that the market has been talking about for a couple of months, was JPMorgan's official position for the past two months that Brazil would lose its investment-grade status. This will put some more pressure on EM currencies particularly the Brazilian real. We have a forecast of 435, which is a meaningful devaluation from current levels, but Brazil has unique problems, it is not a broad issue for emerging markets. People think that the emerging market benchmark is lost of BRICS but it is not anymore. If you add Brazil and Russia together, it is only 10 percent to the benchmark. I would hope if they weren't going down but we can live without them going up.
The other thing we want to highlight is the technology space. The whole Apple story seem to be totally underwhelming; no one sort of covering it but behind the scenes we are seeing a recovery in the semi cycle and in this falling market we been seeing some large tech stocks in Asia and also in developed markets beginning to go countertrend in terms of their rising against falling market. We are also seeing that in some of the Korean auto names as well.
You were talking about another strategist's recommendation, a very similar views on these markets are near GFC - Global Financial Crisis' lows, valuations are very down, the confidence is extremely weak and that tends to be a good buying opportunity. Remember that the median return post correction in EM over 12 month period is around 30 percent. So in the past it has paid to go against the trend. I know at these points your confidence level tends to be at its lowest but the smart money, if they are willing to take a medium to long-term view, are gaining a good entry point today.
Sonia: You were mentioning that a lot of emerging markets have corrected 30 percent already but how does India feature in this basket because we haven't yet seen a 30 percent correction in this big bull run that started last year. Do you fear more downside in the Indian markets?
A: I could see a period where perhaps India in a recovery does not get the same sort of beta because it hasn't fallen as much and also there is a positioning issue in India that we have talked on many occasions about which is clients are relatively more optimistic about the fundamentals in India and are therefore positioned overweight India within an emerging market context. So, there is an argument that maybe India lacks in a recovery trade and that is more a technical factor rather than necessarily a function of the relative fundamentals.
Latha: Is there a risk of more debt downgrades or is Brazil the big one and that is out of the way?
A: Brazil seems to be the big one. If you look at the balance of Latin American, the Mexican fiscal management is extremely good, balance of payments are fine, they have put through reform programs so people are comfortable with Mexico. In Columbia and Peru, they face some real challenges with declining commodity prices particularly energy prices. However, macro management has been reasonably prudent and we would make a similar statement about Chile. So we think Brazil is a particular case. If we look at the Eastern Europe and Africa, there are some concerns about balance of payments in South Africa. However, it is not our view that they are going to lose investment-grade rating and the rand is basically been taking the pressure.
In Asia there were some concerns around Malaysia defending its currency, never had concerns about investment-grade rating, but concerns about its currency being defended at 3.8. Very sensibly the Malaysian government stood away and is allowing the market to set the rate and you have seen the ringgit weakening very substantially which looks disturbing but it is exactly the right thing to do. We are getting a lot of questions about is this 1998, is this the Asian financial crisis? Our response to that is no, it is not. Currencies are acting as the shock absorbers, forex (FX) reserves are high, current account positions look pretty good, in places like India and Indonesia there has been notable narrowing current account position.
So, you have got an understandable risk off event, you have got all the pressure that associates with the strong dollar, weak euro, weak yen, renminbi move causing a currency move. However, I don't think this is an event where you have other Brazil's out there.
Anuj: I was just looking at some data, for India in particular in dollar terms; we are back to 2009 levels. Do you think long only funds will lose a bit of patience because they are making money in the other markets but in India in dollar terms you are practically not making any money in six years?
A: Emerging market (EM) equities have underperformed developed market equities by 60 percent in the last five years. Trust me; there are very few people out there that have much good to say about emerging market equities, those in the States and Canada over the last two weeks. I am finding global clients with record low positioning in these markets and generally a very bearish bias.
However, having said that, with those record low positioning, they wanted to know what was going on in emerging markets. I think that perception is probably much more negative than the reality. So, in a year where we have had nearly USD 40 billion of outflows from EM equities and I am including China in with that statistics, this is almost 2008 which was the GFC. So, I think the whole positioning argument is highly bullish rather than bearish.
Sonia: That point is taken. Your views are eerily similar to Jonathan Schissel of Ashburton who we spoke to yesterday afternoon when the markets were closing and even the kind of stocks that he mentioned -- he did tell us that he is increasing his allocation to some of the private sector banks like ICICI Bank and Axis Bank and I look at your model portfolio and you have an overweight on these private sector banks as well, some of these stocks have corrected 15-20 percent this year already, is this a good time to be increasing your weightage to some of these quality names?
A: We are out there with a call which is a counter consensus call or clearly a counter trend to add to emerging markets and in the case of the private sector banks in India, these are very good long-term investments and when you get these types of corrections just if you think you should be adding to them but you asked me a question earlier about what would be the nature of the rebounce, a 15 percent fall is a modest fall relative to what we have seen elsewhere in India.
Latha: I got your call that this is a time to buy the dips but do you think the market has adequately downgraded Indian stocks as a result of the global downgrades? We did see some bit of downgrades after Q4 and Q1 numbers in India but the new global arithmetic that we are coming to terms with over the past 12 weeks -- has that been factored into Indian numbers? After all a weakened global economy will also mean chipping away some of the earnings in India, won't it?
A: Let us just think about the question you just asked me. The US economy is running above potential as is the European economy. Yes we did have some downgrades on Japanese gross domestic product (GDP). The Q2 print for the US economy was 3.8 percent. Last night we had job vacancy data so these are unfilled jobs, which is at the high that we last saw in 2001. In peripheral Europe, I am seeing economies in Czech Republic, Hungary, Polland running well above its potential, Spain is growing at 3 percent. I don’t understand this story, there is something wrong with the global economy and it has weakened, stock prices have gone down but if people paid attention to the Independent Financial Advisors (IFAs) survey in Germany, if they look to the labour market data in US then they would understand the global economy is probably looking the best that we have seen since the global financial crisis (GFC).
Maybe what happened is the S&P which should be rising every year has lost trend and has corrected and I think a lot of that probably is to do with two big factors, one is confusion around whether the Fed will move on September 17 and substantial confusion around Chinese policy particularly the People's Bank of China's (PBOC) actions in moving the renminbi from a fixing to a more market price and then proceeding to a lot of intervention.
Sonia: Are you increasing your allocation to India or have you increased your allocation to India in the recent fall and if yes, to what pockets?
A: I make recommendations, so I do not change my allocation but if you look at the model portfolio we been running, we upgraded Korea and Taiwan last week and we think the case for those is very strong, so at the margin we been funding by reducing our overweight in countries like India. So Korea and Taiwan are probably the key stories here.
Latha: How else would you play the India story? Are you confident of fiscal spending on investment relates stories like roads and railways, is there any way you will play that, any other themes you are playing in India?
A: I think we should talk about here in terms of delta in India and there has been some two negative delta points. We come to the end of the monsoon. It is a deficit now rather than we tended to go backwards and forwards worrying about whether its deficit or above average and so the trade that maybe the adverse rural consumption might begin to turnaround. I think that looks less likely and then some debate about interaction in terms of Reserve Bank of India (RBI) policy. We also had the hope that India would move to a common market through goods and services tax (GST) - that looks less likely as well and so the other dynamic is that the rupee has followed other EM currencies weaker. So you are probably thinking about a slightly more defensive quality strategy in this environment. So the Indian IT names are still looking attractive within the story. The right high quality private sector banks because maybe the public sector undertaking (PSU) banks are more exposed to bad debts in rural India and in terms of playing fiscal spending, our preferred way is to do that through building materials, through cement names where it's an easier story to execute on than maybe large construction projects.The Great Diwali Discount!
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