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Last Updated : Apr 07, 2016 08:00 AM IST | Source: CNBC-TV18

India a buy on dips market; global politics key risk: JP Morgan

Mowat further says that after the shaky start to 2016, there has been significant change in sentiment towards emerging markets (EMs) over the last one month. India currently, he says, is a buy on dips market.


The Reserve Bank of India (RBI) moves to ease interest rates and at the same time improve liquidity to help borrowers benefits from low rates  could be a game changer for the economy, says Adrian Mowat, MD - Chief Asian and EM Equity Strategist at JP Morgan.

The RBI, in its monetary policy meet on Tuesday announced a series of measures to improve liquidity in the banking system, so that banks pass on the benefits of lower rates to its customers.

Speaking to CNBC-TV18, Mowat says that there has been a degree of momentum building in the capital expenditure cycle. There are expectations of the wholesale inflation turning positive, he adds.

There have been improvements in sectors like automobile and cement. JP Morgan expects a 10 percent increase in cement sales over two months period, he says.

Mowat further says that after the shaky start to 2016, there has been significant change in sentiment towards emerging markets (EMs) over the last one month. India currently, he says, is a buy on dips market.

Falling interest rates in EMs like India and Indonesia will be tailwinds in the next 12 months, Mowat says.

While there is disappointment over Modi government’s performance in global circles, domestic industries are happy with faster delivery of promises, Mowat says.

Speaking on global markets, Mowat says that there is room for Federal Reserve to hike rates two more times. Any rate hike will be an indication of improving US economy, he says.

Mowat, however says, the worry is more on political side currently. “Gobal political risks are very high,” he says.

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

Latha: What are your views on the monetary policy that was announced yesterday? After a long gap, we are seeing the Reserve Bank of India (RBI) announce that it understands that liquidity deficit is a problem and it has announced a fairly big gush of liquidity, it will come to surplus in the interbank markets. Do you think this is game changing?

A: I do think it is significant. So they are addressing a problem in the market, which is liquidity and they have also got a statement that we remain accommodative. I think for the headline news though it was bang in mind with market expectations, markets have rallied very hard from the mid-February lows.

So, I think a degree of sell-on news particularly on what was a relatively weak global equity environment was quite rationale but I am with you that this is game changing.

Latha: How would you play it?

A: I would want to add another thing to this which is that you have wholesale price index (WPI) last year, at one point it was nearly -5 (minus5) and now WPI is 1.1 and I think as the year pans out, the WPI will start to turn positive.

We were discussing this last time I was on the show about how real interest rates for the industrial sector will effectively double digits with WPI deflation and high policy rates. We are now seeing this convergence. That is very good news when we think about corporate capex.

If we look at some of the early indicators for corporate capex such as truck sales, they are now turning around, they look very encouraging, the Purchasing Managers' Index (PMIs), which is still a relatively low number, at least are moving up. We are looking at the first two months of cement sales plus 10 percent.

So I think there is a degree of momentum building in some of the leading indicators of capex and we have a decline in real interest rates for the industrial sector and that looks very encouraging.

Sonia: You have been travelling all across India, yesterday you went Delhi as well, meeting a lot of investors, what are people thinking about emerging markets right now and India in particular?

A: There has been a significant change in attitude towards emerging markets in the last month. So, we started the year terribly badly. You have that circuit breakers being put in place in China, which was a disaster, the Asia market fell dramatically, concerns around the EM currencies built again and you had a collapse in emerging market equities and we also had very weak global market.

Then in the middle of February we began to see an end of the dollar bull market, the EM currencies have been very stable even though you have had this significant volatility in capital markets. That has given people the confidence to start allocate capital back towards emerging markets. When they are starting from very bearish positions.

So, initially, what you see is exchange traded fund (ETF) inflows start to build and a lot of the analysts are just simply short covering their positions and so we are seeing the shorts being removed and now we are having conversations with the long only managers about whether they are willing to increase their exposure to emerging markets.

That discussion is at a very early days but considering how bearish they are, it is either they are going to do nothing or they are going to add and I think they are going to add.

Sonia: What about you? The last time we spoke with you, you had indicated that India is still a market that is a buy on dips, is it still in that camp?

A: Definitely, it is a buy on dips. As we are discussing with monetary policy here, as we look at emerging markets globally, the places with high nominal interest rates would be India or Indonesia.

You would also find a place like Brazil, Brazil has its own political issues on significant structural challenges. So both in India and Indonesia, these are markets where monetary policy could be a significant tailwind for the next 12 months. So, that is a very important thing to highlight.

Place like China is causing interest rates and it is easing monetary policy but their loan growth has been very high anyway and people have mixed views about whether this is good or bad, short-term it is good but aren’t you just adding to your long-term problems?

Anuj: I was willing to discuss the fund flow situation a bit more. We have seen a tactical rally play out in emerging markets. Do you get a feeling that the long only money would still wait for some more evidence in terms of maybe Q4 earnings or maybe even the next quarter's earnings before deploying and would wait for some more time and that could give some kind of advantage to bears to come back and again have a bit of a tactical play in the month of April and May?

A: What you see with earnings is typically equity markets will turn two quarters prior to net revisions turning positive. So, there is a great danger as an investor if you wait for the earnings numbers. If you wait for the actual numbers, your returns are going to be a lot less.

So, I don’t think professional institutional investors will wait. What they will do is that they will say in a country do I have monetary and fiscal policy pro-growth, is business sentiment improving? If I see those types of dynamics then it seems reasonable to assume that the earnings revision story is going to improve at some point out there in the future.

Anuj: The reason I asked is we had a big sell number yesterday. I know you don’t want to make a trend from one day number but this has been a bit global in nature as well. We have seen big inflows in emerging markets all through March but in the first week of April, we have seen flows slowdown a bit.

A: We cannot take one day to point and extrapolate it. Here we have had a nice big rally. We don’t just move in one direction in equity markets. So, a degree of let us take a little bit of money off the table, a period of consolidation add into that weakness is the way I would like to approach this.

Latha: Which quarter or how much of an earnings growth do you see in FY17, in the current year and this 13 percent rally we saw from the Budget day lows, does that somewhat discount this earnings growth?

A: It must discount something as obviously we have rallied from the lows but then if we think about year-to-date (Y-T-D) performance, it is neither here nor there in terms of what happened in Q1.

The number at the moment for fiscal year 2017 is 14 percent if we look at our analyst\\'s aggregate numbers and I am using MSCI India for this, similar for Nifty where there are volatility around this is You have got quite a number from the industrial sector with the relatively low capacity utilisation, we are seeing some consolidation in some of these sectors for instance cement. So, you might end up getting much higher earnings growth out of these more leveraged sectors.

When we look at the revisions that have happened to the EPS integer for financials that is something like minus 70 percent in the last 12 months and so there is a lot of risk around how much provisioning occurs but to some extent, what tends to happen with financials is when you have very big provisioning, it is usually a buying opportunity, isn’t it? Because people are just -- tell me the bad news, I can price that in and then we can look ahead.

So, I could see an environment where we don’t see that 14 percent but if we don’t make it and it is because we have had a bit more kitchen sinking with the banks and at the same time we are seeing some evidence maybe from the truck manufacturers as well as cement companies etc but the cyclical earnings are picking up and the market will be comfortable with that and probably the P/E multiple rises a bit.

Sonia: I don’t mean to pour cold water over your enthusiasm but how high is the probability of a curve ball from global markets? Do you think we could see a global correction in the second half of the year led by a fear of a rate hike as well as weak data from markets apart from the US?

A: Yes, I am not particularly worried about the Fed taking rates up again. So our base case is two more increases.

The psychological barrier is getting through the first one and realising it wasn’t a big outflows from risk assets, the opposite has happened. That is the important thing here. If the Fed feels confident to take up rates then that is going to be quite a positive message for the US economy.

As we look at the US economy, it generates 200,000-250,000 jobs a month, credit growth is running at about 6 percent. That looks fine to us. Problem is the gross domestic product (GDP) number at 2 percent, small moves in inventory cause quite big changes relative to 2 percent. So, we tend de-emphasize the GDP numbers and look at job creation, that looks fine. So, I am not worried about that.

However, I am worried about politics and if the current leader in the republican -- we have a geopolitical situation, which is disturbing at lots of different points and in Europe we have this Brexit's vote on the June 23, Europe lacking leadership gets weakened by this British referendum on exits, we have a terrible humanitarian crisis in Europe with these refugees and unfortunately that has now been made into a political statement, which is diabolical but unfortunately that is the way it is going, similar sort of statements coming out of the candidates in the United States.

I worry about people projecting out trade wars from the type of statements we get. So I think the politics risk is maybe more to focus on. I think economies are unbelievably dull. The potential growth rate for the developed world is 1.5 percent, we have been running at 1.7, a little bit above that, we have ran at 3.7 percent for emerging markets. We think potential growth is 4.5. These are the types of figures and when you look at what economies are delivering, it has been very close to that potential.

Now, where we have had a problem in equity markets is being with earnings and it is because we have been dealing with this rapid decline in commodity prices, which has given us deflation in the industrial sector, which is very bad for earnings. To some extent, I think we are coming out of the worse of that just because the base effect gets a bit easier.

Anuj: You did mention politics, I just want a word on how have you read the Modi government's performance so far especially from equity markets point of view, next month we complete two years?

A: I think it is an opportunity at the moment because the international perception is quite downbeat and it tends to be very focused on whether they have got bills through the Rajya Sabha and not the Lok Sabha and there is this view that Modi hasn’t delivered but when we have conversations with Indian businesses, they are finding that approvals are coming pretty much faster.

The activities that is going on with the banks being forced to realise non-performing loans particularly the public sector undertaking (PSU) banks, all these sort of things are very good administrative stories.

So, I think we are under-appreciating the micro and people are focusing on the macro, the parliamentary acts and saying that it is failing. So there is an opportunity there. Just when there was too much enthusiasm two years ago, you have to tamper your enthusiasm.

Sonia: Two important discussions, one from Dipak Gupta, Joint MD of Kotak Mahindra Bank and one from Sudhir Hoshing, Joint MD of IRB Infrastructure, what was your key positive takeaway?

A: It is the actual activity data picking up, we have confirmation in terms of the amount of road traffic, we have confirmation in the number of orders that are being given out in the road sector and these are very big. You are talking about over 50 percent growth in the previous fiscal year projecting in a budget of another 55 percent growth, some 20 billion being spent on roads. That is significant.

Then we get confirmation from this and off air there was a conversation about what might be happening in Andhra Pradesh -- these things are all making progress and maybe the first two years of the Modi administration is about foundation building and you start to see the acceleration in growth towards the end of the term but not at the beginning and this is common around the world for example in places like Mexico, they had a big reform movement early on and then you see a pickup in activity later on.

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First Published on Apr 6, 2016 10:18 am
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