James Glassman, senior economist at JPMorgan, says the market bounce back is as puzzling as the fall. He does not think there is any need to worry about the correction in equity markets as global fundamentals remain unchanged.
For the first time in 25 years, the outlook for India is stronger than China atleast for the next two years, says James Glassman, senior economist at JPMorgan. Despite the myriad challenges facing the Chinese economy, the global economy is in good shape, he told CNBC-TV18.
According to him, the market bounce back is as puzzling as the fall. He does not think there is any need to worry about the correction in equity markets as global fundamentals remain unchanged.
He also believes that with the US economy moving forward, a possible September rate hike is on the cards. He says it is not so much about the kind of data coming out of the United States, but about bringing the Fed policy back to normal. "The longer the Federal Reserve delays hiking rates, the quicker it will have to move. This may be more destructive," he adds.
Against this background, he adds that the global markets bounce back is not surprising. Glassman also adds that the worst for emerging markets is behind us.
Below is the verbatim transcript of James Glassman's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: What accounted for that monster rebound that we saw across all risk assets yesterday?
A: We do not really understand why the equity markets tumbled so much in August. People were scratching their heads and reaching for explanations about slowing in China.
However, the global outlook hasn't changed that much and so when you have a technical correction like this in a very thin market, it is not surprising — for the market to bounce back, I think it is as puzzling as when it corrected.
I think the basic picture looks not very different from what it had been. If China is having issues, it is not too surprising when you think about it because Chinese currency has been rising very significantly over the last ten years and other currencies have been declining, for example Mexico is doing much better and it might be that the challenges that China is facing is at the expense others are benefiting and so what that means is China maybe facing some challenges but the global economy in general is still quite good. Therefore, with that as a background and with the US economy continuing to move forward and we are getting closer to the Fed probably starting to raise interest rates, it isn't too surprising that the equity market might be correcting itself a bit.
Latha: What sense you therefore get about the Fed? The data as you point out was good whether it's gross domestic product (GDP) or labour numbers. Now with the market finding their feet, you think the chances of a rate hike on September 17 look that much more probably over 50 percent?
A: I do. The Futures market, still a sign of fairly low probability, people have been noncommittal on this but for me the logic of the Fed to begin to raise interest rates is less about the data and more about the need to get Fed policy back to something more normal in an orderly way and a lot of people are nervous about what the Fed might do, what that might mean for the emerging markets but I think if the Fed can start this process earlier and next week is a very good possibility then it allow them to go more carefully, more cautiously and in the long run that will be a healthier adjustment for the emerging markets as well.
So I think the case is pretty compelling for the Fed to begin. The sooner they can go the more gradual they can be. If they delay they will have to move quickly and that might be fairly disruptive, it will be more difficult for the market - the Fed has to be moving more quickly in response to what is going on here. Therefore, from my point of view the US economy is doing fine and it justifies the beginning of a very gradual normal Fed policy.
Sonia: What is your view on India now because so far up until the fall India has been the best performing emerging market, not only in the equities but even when it comes to the macros as far as growth is concerned? What is the sense you are getting from now for the next 6-12 months?
A: It makes sense that the market would be behaving better because for the first time in 25 years the outlook for India over the next year or two is called for a much stronger growth and stronger than what is going on in China whereas India's economy has been growing about 2 percentage points slowly than China. I think this year is going to be a very good year, 9 percent growth over the four quarters of the year where China may be slowing down for the first time in a while to 7 percent. So I think the table is turning and the fundamental picture for India looks promising. So I am not surprised that the markets are picking up or not.
Sonia: Since you did mention that the global economy is in good shape baring of course what is happening with China, what would your view be on equities as an asset class, I understand that you follow the macros more closely but a couple of weeks ago there was talk that equities as a cult was losing favour and would underperform compared to other asset classes like bonds, what is your own assessment now?
A: It really comes down to where you think these developed economies are in terms of their recovery process. If they are near the end then I can understand the argument that equity markets are correcting. However, the fact is there is still fair amount of room to grow. These economies are still not there yet, so, that makes me think that there is still upside for earnings and a reason to believe that we are not near time yet to be worrying about equity markets correcting. So, I think with the developed economies still in recovery and the developing economies have pretty good momentum and that means to me that the outlook for the equity markets still seems pretty constructive.
Latha: Outlook for emerging markets at least bottoming out or would you see even more commodity slips and therefore commodity related emerging markets (EMs) getting a further bashing. Is that process over?
A: Probably most of this bad news is behind us because if these developed economies are improving and becoming more optimistic, I think the pessimism about emerging markets is slightly exaggerated because if the developed economies can continue their recoveries, it is going to help a lot. For many economies, the struggle was when you have an important market like Europe stalled that is a very big challenge for the developing economies.
I think that is changing now and the outlook for Europe is looking a little more promising and US continues to look pretty good. So, for that reason I think the worst is over for the emerging markets and I don't think that a beginning of an adjustment by monetary policy in the US is going to be that bigger challenge that everybody thinks because this will be a very orderly process. The Federal Reserve can always slow this process down if it turns out that there are more headwinds than they anticipated. However, for now, the worst of the fear is behind us.The Great Diwali Discount!
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