India to give 20% returns in 1 year; buy banks: JP Morgan

Below is the verbatim transcript of Adrian Mowat’s interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Sonia: What is the expectation from the Fed reserve meeting this time?

A: There are two key things that we are expecting. The first is that they will finish Qe3, so the final sort of USD 15 billion of asset purchases will be completed and that they won’t continue.

There was some confusion around that with the St Louis president Mr Bullard suggesting that maybe they should continue it but we don’t see any other support within the federal open market committee for them doing that particularly as the macro economic data was basically tracking what they are expecting.

The other key item to look out for is the wording with regard to interest rates and we still expect them to maintain zero interest rates for a considerable period of time so that language will be seen as important for the market.

Latha: So you would expect that the bond purchase will be stopped in this policy statement. What will be the nuances that you will watch out for in terms of the wording?

A: The wording is whether they continue to use considerable time when describing keeping interest rates low. Remember that the start of the weakness in markets that we saw in early September was running into the federal open market committee meeting where the market was speculating that they might remove that phrase. That initially caused the markets to be concerned, the dollar appreciation to accelerate and then as the month moved on we seemed to start to worry about other things such as European growth, a falling oil price being evidenced of weak growth rather than just plentiful supply. So I don’t know whether we are doing a sort of full circle here from the meetings six weeks ago. But my suspicion is that we will look at what is the Fed’s say and we will decide not much is changing and probably we have got very low interest rates for a very long period of time.

Latha: You would not expect new phrases or concerns to make their presence. For instance Stanley Fischer referring to the strength of the dollar specially. Anything like that would make its presence felt in the Fed’s language or statement?

A: Well if it does then that would be market positive. What Fischer was referring to was potential external weakness due to dollar strength and also weak European economy and that would argue for a delay in the increase in interest rates relative to not having those negative external conditions.

Sonia: What is your view on the Indian market now because in the last couple of weeks we have seen a spate of tough reforms undertaken by the government, whether it was diesel deregulation, gas price hike? Would you add more money into the Indian markets now?

A: Yes, we would and today we had the results of the Brazilian presidential election. We had been hoping for a more constructive policy environment in Brazil. That is not going to come through we believe. So we have downgraded Brazil from an overweight to a neutral and we would advocate people taking their capital and investing in the countries that big beneficiaries of the decline in oil price.

So the countries we particular highlight would be India, Indonesia and Thailand within the Asian region add to that India getting a benefit from inflation through a more productive way of dealing with the agricultural sector, I can see agriculture inflation coming down quite a lot in India plus we have got a full momentum that the investors were getting a little bit cynical prior to Prime Minister Modi’s return from his foreign trips.

Latha: Yet we have seen Foreign Institutional Investor (FII) flows almost plateuing, and even some days of large sales in October itself. Do you see this phase playing itself out and more money flowing in in November?

A: Yes, it is always very important to put Indian flows into context to the broader emerging market flows. We have seen an increase in volatility in both bond markets, equity markets and currency markets. when that occurs people tend to sell risk assets including emerging market equities and we have seen strong outflows from emerging markets mutual fund and ETFs and India has actually done relatively well against that quite powerful negative tide.

Sonia: Since you have recommended putting in more money into the Indian markets what would the sectoral preference be now?

A: We have seen an outperformance in the last couple of months of the external sectors such as IT and pharma. So a more defensive bias to our performance. With what is happening with reduction in inflation gives you a more attractive environment for interest rates and cyclical stocks. So we are pushing the banks and we continue to advice the investors to look at some of the cyclical names particularly those that have pulled back from the peaks that they reached a few months ago.

Latha: Barring one most of the big IT boys actually underperformed the market expectation. Do we see you actively take your money out of IT and putting money into the sectors you just spoke about the cyclicals?

A: There is a context here. For me in a global emerging market portfolio the Indian IT names still look very attractive but if I was running dedicated Indian money then yes, absolutely we would be making a sector shift out of pharma and IT into some of the more cyclical names. Our preference would be near cyclicals like the banks but we would also be looking at the consumer names. You had a session on two wheelers prior to me speaking, also the auto companies. You may also want to look at some of the building material names as we move into a year where we would expect the Indian economy to be picking up pace.

Sonia: So what kind of returns do you think this market can deliver now up until the Budget. We have already put in about 27 percent since the start of the year but since you are recommending more investments into India do you think we could replicate that return in the next 6-12 months?

A: You could get 20 percent plus returns out of the Indian market. That would certainly be consistent with our broader emerging market call and the fact that we are overweight India.

Latha: The other big trend that has been pushing up Indian markets has been the kindness in the price of crude. We have seen some dramatic falls there, what is the in house view at JP Morgan. Do you expect it to continue to remain soft for the better part of 2015 and how will that determine your stock selection as well as country allocation?

A: We would look for crude to basically be tracking the forward curve. So we don’t see further weakness, maybe slight drift higher but it is still a very advantageous environment for India and many other emerging economies as it is for the developed world consumer. So this is a very important dividend coming through. There is a potential downside risk to crude. If you look at the magnitude of the increase of US production over the last seven years it is quite substantial. That increase in production is equivalent to most Organization of the Petroleum Exporting Countries (OPEC) producers. People are underestimating just how important that has been.

We are also seeing a lot of technology changes at work which is in particular making vehicle fleets a lot more efficient. So we are broadly constructive in the idea that oil can stay at these levels and perhaps there is a little bit of downside risk.

Sonia: You did mention a 20 percent growth that you are expecting on the index but do you get a sense that midcaps could outperform because we have seen a huge outperformance from midcaps since the start of the year?

A: I was fine stating whether midcaps can outperform. It is a difficult one and it rather depends on sector composition within the countries of the midcaps. There are going to be risk on attitudes in India which tends to favour small and midcaps if they are trading at discounts but also give you the added risk of less liquidity. So I am very open minded to buying these but they need to be in the right sectors and they need to have the right earnings provisions.