Neutral on India, bullish on China: JPMorgan AMC

Geoff Lewis, JPMorgan AMC is currently neutral on India. "It has had a very good run. It has been one of the best performing Asian markets year-to-date (YTD), but probably quite a lot of the good news, end to policy paralysis and slightly better economic data, is already priced in. That does mean that we expect any major setback. The other way of looking at neutral is fully weighted," he explains.

He further says he would be positioned in for a heavier overweight in emerging market equities at this time. "Chinese equities, the data has been improving, they are on low valuations. It is a good time to increase an exposure to China," he adds. Multibagger ideas: 2 stocks that can give you good returns Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Q: How are you reading the statements coming out from the US with Republicans and Democrats showing more inclination to accept tax hikes and spending cuts? Do you think that any more creaming of equity market gains is not there or do you think this is sounding too hopeful? A: A little bit hopeful. I think it is still early days, although initial signs are coming out after the meeting with President Obama by the house leaders last week with Republicans talking about the need for some revenue increases and Democrats accepting the need for some spending cuts. So, the early signs are quite positive. But when it gets down to the detail, when that goes line-by-line through the budget, things will get a little bit tougher. But we would say there are only three outcomes, an earlier agreement, a late last minute’s agreement or a late agreement after the fiscal cliff has started. Q: We have the Japanese markets run up quite significantly ahead of the elections on December 16. Then conversely we had the Chinese market sell-off, post the change of leadership. We had the US markets actually sell-off post Obama being re-election. Which would be the most important dynamic to watch out for in terms of any sort of reaction on the currency or the commodity space? What is happening in terms of West Asia and the concerns with regards to the geopolitical tensions there? A: In Japan, the market is expected the government to be more aggressive on both fiscal policy and on monetary policy, especially the Bank of Japan (BoJ) to do a lot more QE. So, I think that is the dynamic that we have in Japan. In US, it is uncertainty of the fiscal cliff and the fact that before the election there was always a chance of Romney victory is priced out. So, we have that dynamic unfolding in there. In China, it is a bit more puzzling. We know that the leadership transition does not change economic policy, though the economic data is improving quite consistently in recent months. So, at some point, I would expect domestic equity investor to become more positive about its own equity market. That could be the catalyst for the renewed interest in China amongst overseas investors. In terms of the economic outlook, US is the most important. We must have a fiscal agreement of some sort. Q: What about tensions in terms of any sort of geopolitical risks rising which could affect brent crude from the Gaza strip? A: The Middle East is always one of the key sources of geopolitical tensions. The areas of countries involved, Israel and the Gaza strip and Jordon, they do not have any oil. But conflagration anywhere in the region can trigger off unexpected reactions. We have a new regime in Egypt, the largest, most populous Arab state. We have a civil war going on in Syria. So, there are a lot of things going on at the moment. Our real trouble between Gaza and Israel could easily spark a confrontation elsewhere. So that can drive up the oil price. We know that that in the short-term can be quite deflationary shock. I do not think there is any way of predicting the outcome there. That is what investors hate the most, they hate sheer uncertainty where you cannot gauge the risk. _PAGEBREAK_ Q: What are you doing by way of asset allocation for maybe the remaining part of 2012 atleast i.e. just about five weeks? What would be your assets of choice? Within emerging markets, which would be your favoured markets? A: Over the last months, we have seen global equities lose 6-7 percent and emerging markets do a little better. So, those quite good returns, which we had at the end of Q3, are now down to single digit returns. What should investors do? It is very dangerous to go into cash. Cash is okay, if you know that there is going to be a conflict in the Middle East or no fiscal agreement. But we just cannot predict those events. So, if there is a fiscal agreement, the markets will go up very quickly. We would stay invested, stay diversified, broadly neutral on equities. We have seen an improvement in relative returns for the emerging markets. So, I think that is starting to be recognition now that people are coming back to emerging markets as their risk appetite slowly recovers. So, we would be positioned in for a heavier overweight in emerging market equities at this time. Q: Which of them? A: I think Brazil is certainly worth looking at, maybe a little bit early for the cyclically leveraged like Korea and Taiwan, but certainly Asia overall. Chinese equities, the data has been improving, they are on low valuations. It is a good time to increase an exposure to China. Q: Where are you on India? A: India, we are currently neutral. It has had a very good run, it has been one of the best performing Asian markets year-to-date (YTD). But probably quite a lot of the good news, the end to policy paralysis and slightly better economic data, is already priced in. That does mean to say we expect any major setback. The other way of looking at neutral is fully weighted.