Global mkts to see 5-10% profit-taking by yr-end: JPMorgan

Given the way the global economic scenario is panning out, one should expect profit-taking to the tune of five-10 percent across global markets by this year end, says Andrew Economos, Head of Sovereign & Institutional Strategy, JPMorgan AMC. However, Economos is bullish on equities going into 2014 and suggests buying on every dip.

In an interview to CNBC-TV18 he said, next year, funds are likely to continue to flow into equities from fixed income. “Developed markets will be the net beneficiaries There will be some very good consequences in terms of that money flow for the emerging markets, because then the macroeconomic fundamentals start to kick in,” he added.

Meanwhile, he expects Fed Chairman Janet Yellen to taper by maximum USD 5-10 billion and does not see much impact of the same on global markets. 

Below is the edited transcript of Andrew Economos’ interview with CNBC-TV18

Q: Are we beginning to see an end to the pro-emerging market trade altogether - the trend that has started in September, is that now played out completely you think?

A: There is actually something more important and perhaps a little more insidious going on. So, we will start to see a selloff in risk markets in general and emerging markets will not be immune to that. My guess is that we will start to see a decline of anywhere between 5-10 percent in equities using the S&P as a proxy for global equities. The bad news is we will see a decline; the good news is it will set us up for a very good 2014 and in particular emerging markets should benefit from that bounce back.

Q: What is this insidious factor you are referring to? Are you seeing tapering as the reason why the markets will selloff or is it that developed market numbers are looking very good, so money is going to migrate from emerging markets to developed markets?

A: It is really just a market structure argument. I am an old trader, so I look at how the market gets structured in terms of participants on both the buy and sell side as well as the fast money specs, the hedge funds if you will and some of the prop desks and I am seeing it has been a very good year. There will be some cause for profit taking going into the end of the year and they should lock-in some gains and prepare themselves for 2014, so it is not necessarily a macro phenomenon, it is really the participants starting to lock-in profits going into the end of the year.

Q: Since you are relatively more bullish for 2014 what is your pecking order in terms of markets? Do you think that this developed market outperformance versus emerging markets will continue well into 2014 or do you see that texture change a bit?

A: What I would expect is we will see this continuation of the Level 1 asset allocation shifts away from fixed income into equities. That will continue. Obviously developed markets will be the net beneficiaries of that, because that is the place where you want to get in early for the recovery. However, there will be some very good consequences in terms of that money flow for the emerging markets, because then the macroeconomic fundamentals start to kick in.

For the first time in a long time we are seeing the industrial production indices within the G4 - the major markets of the world start to synchronise, that means a albeit halting but still upward move in economic growth that is very good for the emerging markets. So you will see funds start to flow back into emerging markets and get those propped up again into next year.

Q: You mentioned that you see about a 5-10 percent fall in risk asset classes in equities. Within the emerging market basket can you tell us what maybe relative outperformers and relative underperformers? Where would India be in the pecking order?

A: As you get a selloff in the larger markets and as we all know that developed markets have been the beneficiary of a lot of this fund flow, so emerging markets are still relatively underweight in the larger institutional investors' portfolios. Therefore you will not get a massive selloff in the emerging markets; you probably will get a bigger hit in the developed markets, namely US and probably Europe as well.

Emerging markets maybe relatively immune or will outperform a little bit to the downside. Ultimately, as I said into 2014 that starts to become a net flow back into equities and flows into emerging markets and I think India starts to participate. You have got sound economic leadership under Mr. Rajan at the Reserve Bank of India (RBI). He seems to know what he is doing. He has established credibility within institutional investors' minds and we will be able to start to invest back into India with a bit more conviction.