JP Morgan sees healthy returns from EMs in '14; signals buy

Q: Up until last week it appeared that the market had come to terms with this kind of a reduction in liquidity. Why the sudden ferocious reaction?

A: We have to careful about saying we are getting a ferocious reaction. The US equity market is 3-4 percent of its high. We had some specific issues in Argentina, where all that happened was that the official rate came a bit closer to the unofficial rates.

There are definitely issues in Turkey and we have been reviving the Turkish gross domestic product (GDP). The central bank had a meeting on the January 21. They didn’t do anything in that meeting and then they follow-up an emergency meeting where they announced quite large movements in interest rates. Turkey is 1.5 percent of the emerging market (EM) benchmark and 1.5 percent is not significant.

If I look at the way the rather unfortunate grouping put together called the fragile five, which is Turkey, South Africa, Brazil, India and Indonesia. I feel very intrigued by the way the rupee and the rupiah have been performing and the rupee has been in 62-63/USD range for a period of time. It hasn’t broken that range. The Indonesian rupiah also is very stable against this backdrop of rand and Turkish lira movements. The market has been relatively smart to understand the fundamentals differences.

Tapering is fundamentally bullish for emerging markets. Tapering is the same as what we saw in 2003 to 2007 when the Fed fund target rate went from 1 percent up to 5.25 percent; a five fold move in US policy rate which is hand in hand with one of the strongest performance in an emerging economy and in emerging stock markets. The fact that the Federal Reserve is comfortable to remove extraordinary monetary policy is a very good sign and people should focus on growth and stop making the wrong assumptions about tapering. It isn’t fascinating that bond yields actually are falling with tapering, not rising. So, understand the issues in Turkey and in South Africa and in understanding them you can see why you do not need to extrapolate into other markets.

Q: That is an important point you made because the Fed did not in its speech acknowledge the turmoil in emerging markets or the kind of volatility that we have seen in the last couple of weeks, does that reflect the judgement that the economy can handle a little bit of this tightening if you would want to call it of financial condition and then move on? So this might just be a little bit of a blip?

A: The Fed policy is designed for the US economy not for other capital markets and the Fed is comfortable that this economy is out of the emergency period that required emergency monetary policy. We have a forecast of 2.9 percent for gross domestic product (GDP) growth this year in the US, which is quite an uptrend, it’s no longer necessary to have quantitative easing (QE). We have volatility in specific emerging currencies and markets. The movements we have been seeing in other emerging markets, the Korea, the Taiwan even India and not particularly unusual in relative to a normal volatility in these capital markets.

I find it very encouraging for bull on EMs to read people writing about Argentina and then extrapolating that to emerging equity markets. Sixty five percent of emerging equity markets are in Asia, the three biggest markets have huge current account surpluses, which are China, Korea and Taiwan and the current account deficit economies in Asia are India and Indonesia. This is going to be a year where we make a lot of money out of the emerging market equities and if we can start off with rationale fears then that is a terrific starting point.

Q: That point is taken that one should look at the Fed\\'s interpretation of the US economy as positive for emerging markets but nevertheless there is a little bit of herd mentality at this point in time and we are seeing a weakness in emerging markets, are you already a buyer in India at current levels, what kind of falls do you see at all, a dip below 5,900 where do you think this herd mentality will stop and people will start looking at the fundamentals?

A: I am a buyer at current levels because if my assumption is that people are behaving irrationally -- I am struggling to put my mind join them to understand when they will stop behaving irrationally. I am the buyer at current levels. We will make very good money buying today over the next twelve months.