JPMorgan AMC finds India attractive; starts upping exposure

Richard Titherington, CIO & Head-EM Equities at JPMorgan AMC says the ECB President Mario Draghi's commentary was disappointing and not enough to support the Spanish and Italian yields. 

Asian shares and the euro eased on Friday as the European Central Bank, after inaction from the Federal Reserve, disappointed markets looking for an imminent move to deal with the euro zone debt crisis, spurring risk aversion. (Full text of Draghi's speech) But Draghi's room for maneuver is limited by Germany's powerful Bundesbank, which he singled out in his post-meeting news conference as having expressed reservations about the decision to explore "outright open market operations". The Bundesbank's reservations mean the ECB will only buy Spanish and Italian sovereign bonds after euro zone governments activated the region's bailout fund to do the same. This in turn would happen only if countries requested such aid. Titherington sees Germans relenting if yields spike significantly. "I think the markets will continue to gyrate between risk off and risk on trade," he told CNBC-TV18 in an interview. Back home, traders look cautious expecting a correction on the back of the ECB's move to keep rates unchanged. However, Titherington says valuations in India have declined to attractive levels, adding he has begun raising exposure to India recently. Below is an edited transcript of his interview with Udayan Mukherjee and Sonia Shenoy. Q: What did you takeaway from what Mario Draghi had to say yesterday? A: I think the press conference was a bit disappointing. Expectations had been raised last week and investors were looking for substantive action from the European Central Bank. As you can see from the markets' reaction, they disappointed expectations, which given the fragile state of the markets is not a good thing. Q: Draghi's statements indicate that they are open to open market purchases. Do you see that putting a cap on Spanish and Italian yields or you think that’s not enough? A: I don’t think Draghi's statements were strong enough to definitively put a cap on yields. As you can see from the media reaction after the statement, the market thinks that the ECB has to announce something more detailed and actually has to take action in the market place in order to definitively put a cap on Spanish and Italian yields. _PAGEBREAK_ Q: Draghi also seems to put the ball back squarely into the court of the European governments for the kind of action that he wants to deliver. Do you think the governments will play along? A: I think that markets are worried that the pace at which governments make decisions at is far slower than markets are moving at. The disappointment from Draghi's press conference was really about the fact that he was putting the initiative back onto the European governments, particularly the German government, rather than having the ECB take the initiative. So although I think ultimately the governments of Europe will get to the right place, it could take them some considerable time to do that. Q: The Bundesbank has been stiffly resisting the bond buying programme. Do you see it relenting in case yields spike beyond a certain levels? A: If yields spike beyond a certain level, the Germans will have to relent. The question is how high is that level. The disappointment after Draghi's statements was that it appears that they haven’t relented yet and therefore there is a risk of further negative market movements being required to provoke decisive action from the German administration. Q: Where does all this leave the risk-on phase that we are beginning to see after Mario Draghi’s statements? Do you think that may begin to fade now? A: I think we remain trapped in a cycle of investors switching from risk-on to risk-off and back again, and I don’t think anything announced either by the Fed or by the ECB has decisively broken that pattern. I don’t know whether we are going to go through a severe period of risk-off, but I don’t think this week's statements have definitively changed the pattern that markets have been stuck in for last several months. Q: What is your call on India right now? We have seen a lot of FII money coming into India over the last five-six weeks, and even you run several billion dollars here. Have you started also upping your weightage? A: Indian valuations have fallen significantly over the last 12 months as both foreign and domestic investors have become more pessimistic about the outlook for the economy and about the political situation. I think that valuations in India have fallen to attractive levels, so we have begun to raise our exposure to Indian equities recently. Although there are lots of question marks about the near term outlook for India, both from the standpoint of the political situation and the obvious difficulties with power cuts, the whole question about the monsoon etc, those are in my view all temporary and they are more than reflected in current valuations for the Indian equity markets. So I am probably more optimistic about Indian equities today than I have been for the last 12-18 months.