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Last Updated : Mar 09, 2016 08:18 PM IST | Source: CNBC-TV18

Technical rebound may continue; like equities: JPM Asset Mgmt

Speaking to CNBC-TV18, Luk says there are expectations of European Central Bank (ECB) and Bank of Japan to ease monetary policy further, which will help in easing liquidity.

Technical rebound in the global equities could continue, says Ben Luk of JPMorgan Asset Management. The key factor this month has been the driving oil prices, which now stand at USD 40 per barrel, he adds.

Speaking to CNBC-TV18, Luk says there are expectations of European Central Bank (ECB) and Bank of Japan to ease monetary policy further, which will help in easing liquidity.

Luk continues to be more positive on equities than bonds with emphasis on European equities. However, he advises caution on European high yield space.

Discussing the Indian market, Luk says while the first two months of 2016 have been taxing due to foreign institutional investors (FIIs) outflows, post-Budget situation looks much better.

One needs to see a sustainable growth cycle to become more positive on India, he says adding that macros are getting better. Luk expects a 25-50 basis points rate cut by the Reserve Bank in 2016.

Below is the verbatim transcript of Ben Luk's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: The month of March has been good for global markets including markets like India. Do you expect this good trend to continue?

A: I think right now it is going to be a technical rebound. We have seen oversold territories in January and February. The one thing that has been the key factor for driving the markets in March has definitely been the oil price and the oil price is up already USD 10 per bbl. Brent is trading around USD 40 per bbl.

This is more of a supply issue as oppose to demand issue. Our demand projections are still targeting around 1.2 million barrels per day, higher comparing to last year. So that is a good sign.

Another thing that most market participants are expecting for this week and also next week would be the European Central Bank as well as Bank of Japan going to further ease and that is going to stimulate risk assets onwards.

I think right now it is going to be a technical rebound but the risk factors are going to improve more slightly as we go into the second quarter of the year.

Latha: You are saying that the kind of toughing out that we have seen in commodities especially crude is likely to continue. We won't revisit USD 25 or sub USD 30?

A: Right now what we are seeing at least on the US production side, US production has peaked already from 9.6 million barrels for a day. Now it is 9.2 million barrels per day. We are going to see the demand projections are going to be revised slightly even higher given that what we have seen last week for China's National People's Congress (NPC) meeting where China is going to push to more monetary and fiscal stimulus to defend infrastructure investment projects and that is going to improve the commodities demand.

We have already seen that iron ore is up more than 20 percent this week given the expectations that the Chinese are going to use more and more of the commodities. So I do not think that USD 25 per bbl is out of the story but the probability of coming back down is already extremely low.

Sonia: What is the asset allocation strategy now? Are you advising investors to buy into global equities now and if yes, what would your top two or three markets be?

A: Right now what we are seeing is that we continue to like equities over bonds. If you actually look at the equity space, the recent selloff is already making valuations extremely cheap especially if you look at the US and European equities that are now trading below 25 year average already on price to book and price to earnings ratio. We especially like European equities.

We think the economic recovery is sustainable. We like the fact that the ECB is pushing further into the negative interest rate policies to boost credit and obviously boost the currency to depreciate, which is going to help from revenues and earnings growth.

On the other hand we are going to be much more selective on fixed income space. We think yields are extremely low for many of those sovereign bonds but given the volatility that we have seen throughout the year and we expect volatility to stay relatively high, we like investment grade bonds; investment grade bonds give us yield around 4-4.5 percent and that is a decent yield pickup given there is no yield around the world right now.

Another area that we have been more selective would be the European high yield space. The European high yield space is very different from the US high yield space. I think most investors are worried that the US high yield space because of the energy sector being around 15 percent of the index - that remains to be a concern but the European high yield space only has 2 percent of the index in energy, most of the index is concentrated in the consumer stocks and consumer names in general.

So this is an area that we like and the ECB is going to change the dynamic of the composition of what they buy possibly this week as well maybe going towards investment grade story and that is going to help the portfolio rebalancing effect and helping the European high yield story. So that is what we are going to advise clients right now.

Latha: Where does India figure in terms of within the emerging markets and in comparison to other markets?

A: If you look at Indian equities, it is definitely been a tough first two months for Indian equities. We have seen foreign investor outflows of around 1 billion per month already and that is because not many investors were worried about the Union Budget.

When the Union Budget did come out, it was a relief because no change in the capital gains for equities and more importantly they stuck with the plan of having the fiscal deficit goal of the negative 3.5 percent of gross domestic product (GDP), so they are keeping fiscal deficit in contact and that is more importantly if they need to drive growth higher, we think monetary policies are going to be more accommodative.

So we do expect the Reserve Bank of India (RBI) to cut rates by 25 bps to 50 bps by the end of the year and that is also going to help the equity story.

I think overall what we need to see and for sustainable rally in Indian equities is the earning cycle coming back. What we are tracking right now is that at least the last quarter earning cycle is still around 80 percent ratings downgrade comparing to ratings upgrade for many of these corporate and the private names are doing much better and that's what we like more but in general we need to see a sustainable earning cycle to come back in order for us to be positive on the Indian story but the macro is getting better and better.

Sonia: You did say that the market is expecting the ECB and the Bank of Japan to ease the monetary policy further, but what is your expectation?

A: Right now what we are expecting, at least for tomorrow, for the ECB, we do expect that the positive rates are going to go even lower comparing to the negative 0.3 percent right now and the other thing that we also expect would be possibly extending the quantitative easing (QE) programme even further or having an open-end the QE like the US is doing.

The one big bonus that we hope the ECB can do is to change the composition of what they buy possibly not only focusing on the sovereign bonds issue but also on the investment grade. So that is obviously going to drive yield to even lower and that is going to be a boost for European risk assets in general.

On the Bank of Japan side, we do expect the Bank of Japan to initiate further negative interest rate policies similar to the ECB but that would be the next step that we will see right now because the Bank of Japan is going to see what the ECB is going to do first in order to see how rates are going to be dependent on them.
First Published on Mar 9, 2016 10:39 am
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