See big recovery for EMs in 2014: JPMorgan AMC

Also read: Expect Sensex to fall 10% in next 1 yr: Ridham Desai

Below is the verbatim transcript of his interview on CNBC-TV18

Q: The big trigger that every Indian investor is watching is the dollar index, because the surge in the dollar index has led to a move on the downside in the Indian currency and concomitantly in the equity markets as well. What is the sense you are getting about how the dollar will move from now until the end of the year?

A: I think currencies have being driven very much by policy, by aggressive monetary easing in turn by the Fed and by the European Central Bank (ECB) and so on, but this has largely neutralised itself and so it has basically been range trading, fairly broad ranges between the major currencies like the euro and the US dollar.

I do not think there is any particular significant cheer for the Indian rupee. This is a general slight dollar move driven probably by the increase in yields that we have seen recently as firmer data has suggested that perhaps tapering will not be delayed quite as much as investors have thought. I think is a very minor move and I would not actually attach too much significance to it.

Q: In that case would you say that the recent correction is actually a good buying opportunity, especially in markets like India?

A: It has been a relatively shallow correction. We are looking at good value for the emerging markets on a 12-18 months basis. Shorter term it is much more difficult of course. In these markets that are driven by macro policy uncertainties and by global factors it is very hard to get your timing right. So I would encourage Indian investors to be looking to a synchronise global upswing in 2014; we are already seeing a pick up in Indian export performance. Much of the bad news on the domestic economy is priced in, so this is a good opportunity to be taking exposure to domestic equities.

After all earnings estimates for 2013 is still around 9 percent and yet the market in local currency terms is probably only up 3-4 percent. So you have had some derating in 2013.

Q: The opinion is veering towards the fact that even when taper comes either in January or in March it will be a taper-light program at worst about USD 5-10 billion of taper by Janet Yellen. What is your estimate?

A: I think that is impossible to say. Once the Fed makes up its mind, I do not think it will be as light as that. It would be at least USD 10 billion a month to start-off with probably with QE3 concluding in no later than the third quarter of next year.

Q: In that case what is your overall call on the emerging markets till the end of the year? Do you think at some point the risk-on phase will come back or do you think that particular rally has now played out?

A: I think we are going to have to see evidence of an inflection point in earnings. We are going to have to see an improvement in earnings momentum across the emerging markets, and it is unlikely we are going to see that in this short timescale. Although you never can tell because the end months tend to be pretty good for emerging markets, so I would stay invested.

However, a big recovery in emerging markets is something for 2014, hopefully first quarter. We are seeing signs now that hedge funds and foreign institutional investors (FII) are beginning to look at the value which they can see in emerging markets and are thinking of moving some money away say from the US equity market which has done so well this year and also probably away from Europe which has also exceeded expectations into these cheaper emerging markets which have sold off so heavily on things like the earlier tapering fears, Current Account Deficit (CAD) concerns, much of which in my view were exaggerated and no more than panic.

Q:  If you are bullish on global equity markets in 2014, what would your pecking order be in terms of market preference?

A: Although US has had a very good run and although it is looking close to fair value on a number of metrics, markets don’t normally stop at fair value, so you still have got more transparency with regards to US economy. Hence, I would stay a bit overweight there.

I would be scaling back on Japan now and I would be overweight emerging markets, preparing positions for a rally in 2014. Also probably still a little overweight Europe.