Correction a great opportunity to add risks in EMs: JPMorgan

Despite the current volatility, not a big cut in emerging markets (EMs) is expected, says Adrian Mowat, Chief EM & Asian Equity Strategist at JPMorgan.Federal Reserve is moving towards a rate hike, which is driving dollar and yields up. This is having side effects on global markets, says Christopher Palmer, Founder & CIO at Bensen Avenue Capital. The US Federal Reserve and central banks are spooking equities, believes Seth Freeman of EM Capital Management. The volatility in the global markets is partly due to transcript of Fed’s September meeting, he adds. “A correction is a great opportunity to add risks in the EMs,” Mowat said in an interview with CNBC-TV18 adding that a fall is an opportunity to get in. However, he adds that strengthening dollar as well rising oil prices are putting stress on EMs. Mowat further adds that upcoming US elections will have a much larger impact on EMs than Brexit. If Donald Trump wins, supply chain of EMs is will get hit in turn impacting earnings and growth. Globally, he expects some tapering in Japan and Europe. Freeman further says that interest rate adjustment may not be gradual next year. Below is the verbatim transcript of Christopher Palmer and Adrian Mowat's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: What’s happening in global equity markets right now, we have seen quite a bit of pressure over the last 15 days. Is this a normal bull market correction or are you sensing something bigger here?Mowat: I think it is almost important at this point to look at some of the bigger statistics, we have had a very powerful move in emerging markets in the third quarter of this year and then we entered the fourth quarter with a little bit of headwinds, but if I look at my screen at the moment in MSCI Emerging Markets Index is down 10 basis points quarter to date and the headwinds we are looking at is we have the oil price moving up on the back of side negotiation now perhaps leading to more of an agreement from Organization of the Petroleum Exporting Countries (OPEC).There has been some chat about whether there will be some form of tapering initially in Japan with the Bank of Japan (BoJ) review and then more recent in Europe, which we see is more market chat, there is absolutely nothing coming out from central banks, but part of that has been a look at bond yield and also look at the dollar, so US 10 year yields at 1.74 percent which is up quite a bit from their lowest this year, but remember we started the year at 2.25 percent for US 10 year bond yields and then the dollar has strengthened, so at the moment if you look at US Dollar Index (DXY) it is at 97.9, the highs for the year is 99, but it is true also the low for the year is near 95, there is a little bit of stress there.The other thing is in terms of China policy and we had one week holiday in China and during that holiday period, the government announced a few measures which are city specific trying to control very large price moves and so there is sort of narrative in Hong Kong about some tightening from the Chinese, which I think is to some extent misplaced and again sort of put this in context we seen China selling off a little bit over the last couple of days, but MSCI China the broad measure of China Index is up 50 basis point this quarter. It is a little bit story of today it looks poor, but remember that we did very well in the third quarter and on a quarter to date basis things don’t look too bad.Now the final thing I have made as a point here is we have the US presidential election on November 8. Clearly, the polls are showing a win for Hilary Clinton, but clients are generally quite nervous particularly after the Brexit vote where the polls got thing wrong and I definitely got a group of clients sitting on the sidelines saying look, let’s have a look at the emerging market story on the November 9 when I either got confirmation or not that the polls are correct.Sonia: So, what is your own view for the rest of the year? Do you see higher risk aversion towards the end of 2016 and the possibility of more than perhaps a 10 percent cut in emerging markets (EM) like India?Mowat: No, I certainly don't and I think this is a great opportunity to be adding risk in EMs. We have an official forecast of the EM index which is 10.50 which is a return of more than 10 percent by the end of the year. And if - let us phrase it in a different way - if the Republican candidate Donald Trump is defeated then you are going to have a major risk on events.Now why am I specifically looking at that event one of the perhaps more consistent messages coming out the Republican candidate and clearly it is difficult to follow what exactly the messages are is a very anti-trade rhetoric particularly focussed against Mexico and China. If the Republican candidate was to win and if he was to implement what he suggested when he has been out electioneering that would be a significant hit to the EM supply chain and it would hit earnings in a big part of the benchmarks such as Korean and Taiwan IT and also Mexico and also see through in the Mexican Peso. So, there is a genuine nervousness around that. Even though the polls don't suggest that that is a likely event, that goes back to the errors that were made in the polling around Brexit.So, I am very much of the camp that market is a little bit weak now, this smart money should be adding rather than taking money away and if we are right with the dynamics which is accelerating nominal GDP growth, falling real rates in EM we have had very good messages coming out of earnings across EMs with positive revisions. Then the dynamics are going to be very favourable.Anuj: Brexit actually provide to be the best buying opportunity this year. In case of US election as well do you think it could be the case of pre-election rhetoric but ultimately the president doing what is good for the economy, do you think in case that is an outside chance, in case Donald Trump wins and we have a fall because of that could that also be a buying opportunity?Mowat: It helps me as a Brit to say this but the UK economy is not that large on a global basis. Its influence on other economy is very limited. So you have a local issue which may be you wanted to expand it, say it is more of a European political issue. With the case of the anti-free trade rhetoric coming out of the Republican candidate which is much stronger than out of the Democrat candidate that is a threat to earnings in the S&P500. It is a threat to earnings in Asia, it is a threat to earnings in Malaysia. Perhaps India is a little bit more defensive although you have a reasonably big export profile in your equity market. So, I would suggest that the US presidential election is a much more important fundamental event than a referendum on the United Kingdom leaving the European Union.Q: What are you making of all the news coming in from the Fed minutes from the September meeting where now we have three dissenters on the board. They are pitching for rate hike this year, what do you make of that?Palmer: Typically if you are watching the Fed the public existence of dissenters and the number of dissenters now is material and does show not only that the Fed is considering a rate hike but that the discussion of the rate hike has been allowed to surface in the public and investors are allowed to observe that debate is an open one and transparent. That typically means that they are trying to give the market absolutely as much information about impending rate hike as possible.The markets of course have moved in anticipation of this rate hike and we have seen 10 year treasury yields in the US. So, they are moving higher and probably already having priced in about half of that move as has the dollar. So, markets are taking their cue from the Fed and moving dollar yields higher the dollar in anticipation of that hike. That is the second time we have seen a hike. This one is increasingly looking like it is being priced in by the market. That is having some side effects for global market in the short term.Q: We know that the labour market seems to have firmed up, there is some disparity in numbers now but it seems like a good picture overall. However the fly in the ointment seems to be the inflation number. They just can't seem to get that moving above the 0.7-0.8 percent mark whereas the target that they have set is 2 percent, it is nowhere close to that. What do you make of that, do you think the Fed will still move with a rate despite that inflation number not really moving to the mandate that they have set?Palmer: Some of that inflow into the inflation number now really does reflect the strength of the dollar and still some effects from dollar strength as it is impacting imported prices. So, that is still coming through. The PPI numbers are still very weak in terms of inflation and immediate outlook. If you think in other countries such as the UK where you have had a big currency selloff, we are about to see inflation rise very dramatically here in the UK. So, the picture for inflation globally is not uniform. Certainly dollar strength would be playing through that inflation picture in the US.I think the fact that the Fed has taken the time to broaden the debate, make it more transparent for investors, show that there is dissent within the Fed itself and the governors that a rate hike is likely before the end of the year. However I think in the nuance of the language I think some of your other commenter's were talking about the fact that the market certainly would like the Fed to get on the if not ahead of the curve but not spook anyone into thinking that there is going to be abrupt changes in 2017. We don't think the US market is ready for that and certainly the international markets if you think about where the dollar is and where the pressure is on some of these other currencies globally. So, certainly that is the last thing that those markets would want to hear.