Emerging markets, including India, have performed better than developed markets recently, and the rally may have more legs to go, says Ian Hui of JP Morgan Asset Management.
Speaking to CNBC-TV18, he said that if the government is able to roll-out more positive reforms during the ongoing monsoon Parliamentary session, the domestic share rally will continue. "Hopefully, the goods and services tax (GST) bill will be passed before the end of this session," he said.
Below is the verbatim transcript of Ian Hui's interview to Latha Venkatesh & Sonia Shenoy.
Latha: There has been huge emerging markets (EMs) rally and India has partaken of it. Only with respect to India do you think the rally still has legs?
A: Yes, we have seen emerging markets do a bit better over the last couple of days. I do think it still has legs, even for India wherein with the current government monsoon session - we will see India is able to rollout more reforms that might be taken positively by the market, we are still looking for the possibility of the goods and services tax (GST) being passed before the session in the middle of August.
However, also in emerging markets, China is stabilising or does at least seem to continue to stabilise. So I think there should be good news for EMs and commodities. Sonia: You think that the Indian market has more legs to rally but what about the Morgan Stanley Capital International (MSCI) emerging market as a whole because now it is trading at about 12.5 times projected earnings which is much higher than its ten year average. Would you a bit cautious about the valuations that have got a bit stretched now?
A: I would be a bit cautious. We are hoping there is going to be an improvement in earnings which would cause a rerating and make this look a bit more positive. I do believe on, looking at valuation from a PE perspective, they are still looking attractive there as you mentioned maybe perhaps on the PE valuation a bit less attractive but we do think there is some positivity coming along that might make justified.
Latha: What would be your pecking order in the emerging market basket in equities?
A: Amongst the emerging markets I still would put India as one of my more positive choices right now. Mostly those countries with a bit less exposure to Europe currently, we did see a bit of recovery after the market believe that the Brexit situation and what happening in Italy, will the banking situation might be a bit under control, but I think that is still currently quite a bit of a worry. Those markets are a bit less exposed that should do a bit better.
However, the US does seem to be doing a bit better as well. We might see strengthening of the US dollar and that might press on emerging markets but I still am positive on India and some other emerging markets in general.
Sonia: So it's a tossup right, between emerging markets and developed markets because all market seem to be doing well now with the Dow hitting its seven straight record close. What is the sense you are getting for the rest of the year. Do you think emerging markets will outperform developed markets?
A: Yes, I do think it is a fairly close call. Emerging markets have done badly over the last few months compared to developed markets. There is some improvement whether that will be enough to carry them over the performance of the developed markets. I think that is a bit uncertain right now especially with the US still isn't looking that terrible compared to other markets right now. I still think there are opportunities in both.Latha: There is a bit of a dichotomy here even a contradiction. Just yesterday and day before we have had the International Monetary Fund (IMF) reducing its global growth forecast, reducing its growth forecast for the US, for Europe and for India as well and yet with each passing day we see the equity indices ticking higher. Are you seeing some ugly finish to this rally?
A: It is a possibility but we have to remind ourselves that it is not always the case that what is happening in the economy is directly related to what is happening in the market. They are somewhat related. We do think that what happens in economic activity might be an indicator of what is happening in businesses but they are not always 100 percent correlated. It is not always the case where if economic growth is being downgraded that would mean that market would also do badly. I think we do have to keep in mind of that.
Of course there is still plenty of uncertainty, we do not know how the central banks will react, will we see still some positivity from central banks with further easing or is the market tired of that. I am still uncertain over how the Brexit situation would turnout. Yes, it hasn't turned out quite as badly as the market expected but when the negotiations proceed further we will see how that goes. However, there still might be a chance that this might not turnout quite as well as expected. There is still plenty of events that could derail this but for the moment things still are looking a bit obvious especially with the start of the US earning season which hasn't disappointed the market so far.
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