According to Adrian Mowat, Managing Director, Chief Asian & Emerging Market Strategist, JP Morgan there is little change in the macro economic data of emerging markets and what is going on is more of a technical story, like for example the circuit breakers in Shanghai at the start of the trading year. So, one will continue to see outflows from emerging market equities believes Mowat.
However, he does not think the current situation in the markets is similar to that of 2008 crisis.
For India specifically there is nothing relatively more negative than what is going on in other markets, says Mowat adding that the one big event that could cause significant outperformance for India would be the RBI moving into a easing cycle but that is still a bit away due to market volatility and concerns over capital flows into the emerging markets.
According to him the Nifty is likely to retest lows of 6300 if China situation worsen.
Investments into India are currently in a wait and see mode, says Mowat in an interview to CNBC-TV18 but adds that investments from domestic investors are still intact.
The worries that are impacting stock markets globally are not really fundamental issues but market specific issues say Adrian Mowat of JP Morgan.
Below is the verbatim transcript of Adrian Mowat’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: What is your sense after the way in which the Indian market have performed and have not been able to yesterday take advantage even of a rising European market. Is the Indian market now in for some underperformance?
A: If we think about the story for India specifically, I do not think that it’s relatively more negative than the balance of what we are seeing going on in other markets. However, as we look at it as a strategist both in emerging markets and globally, what we are seeing is very little change in macroeconomic data and what we think is going on is a more technical story; we had the story of circuit breakers in Shanghai starting the trading year and that was a technical story where investors in Shanghai were worried about overhang of stock as major shareholders’ lock-in-period were going to be removed and they are also afraid that with this circuit breaker mechanism, if the market fell sharply, they will be locked in a bit like they were during with the big selloff in July and August.
However, we also had an events in S&P, where most strategists expect very low to negative returns this year, earnings are like to decline for the S&P broadly particularly with what is going on in the energy sector, interest rates are going up and market is expensive. So we have got a market event here rather than economic event. The US fundamental data looks reasonably good with strong non-farm payroll print.
Therefore, we are sitting here in an environment where stock markets have their own issue which is not necessarily a fundamental story. I think specifically on India, the big event that could cause India’s significant outperformance would be the Reserve Bank of India (RBI) moving into a more meaningful easing cycle and that is still a little away particularly because of some of the volatility we have seen in market and concerns around capital flows from emerging markets.
Sonia: When we spoke at the start of December, you mentioned that the key monitorable now will be the investor confidence in emerging market equities, earnings growth. Since the last time we spoke and now has any of that confidence gotten eroded?
A: I think it has primarily because of currencies, so there has been a downgrade in emerging market earnings per share (EPS) but that has been a currency translation effect, a little bit driven by China but to a greater extent driven by Brazil and South Africa, where you have seen major currency moves. However, looking at India on a relative basis, the INR has been reassuring the stable as has the Indonesian rupiah. So two currencies that were part of fragile five seem to have broken out from the fragile five story which is still very much going on when you look at the fall in the rand and the real.
Latha: We are starting our earning season and Tata Consultancy Services (TCS) has underperformed muted expectation, what is your expectation
from this season itself, would we begin to see some green shoots, some earnings improvement?
A: Yes, what we are more encouraged by is that the expectations are very modest now. So I think the chances of the whole series of negative earnings surprises are relatively modest. So, we are going into the earnings season feeling okay but not viewing it at something that is going to drive the market higher or lower. I think with specifically in the IT space, we have seen a divergence in trend with Indian IT companies. That does seem to be sort of flip-flopping between which companies are getting it right over the last couple of years. So I am not sure if I will read too much into today’s results.
Sonia: As an equity market investor who is watching you right now what would you advise at 25,000 on the Sensex, should the strategy be to buy every dip or has this now become a sell on rally the Indian market?
A: I would still put India in a camp as a buy on dip but I would like to highlight something in the Chinese equity market. MSCI China is now 30 percent of the EM benchmark. So it is clearly extremely influential in terms of the way people are thinking about EM.
We have a series of derivative products out there in the Hong Kong H-share markets and if the H-share index was to drop below 8,000, which is certainly a couple of percents away, you would give a knock in these derivatives products, you get future selling. We do run the risk that the H-share market draws EM down, it is a very technical story while the necessary long-only fund managers selling but I think we need to be aware of that and I, for now, would advise a little bit of caution rather than aggressively buying dips at the moment.
Anuj: In equity market you have to be prepared for all scenarios. So far we have been talking about how this could be different from 2008. Is there a risk that this could be worse than 2008 for equity markets?
A: The only scenario we don’t seem to have been prepared for is rapidly rising market. I do not think it makes any sense that this should be a 2008 event. Remember, that was a global financial crisis; we were questioning the viability of the US financial system, we then rode into a year old crisis. Leverage in the developed world has come down particularly in the corporate sector we have reasonable economic growth and we tend to measure this a bit more while looking at housing market, looking at labour data rather than volatile GDP.
I think we have expensive developed market particularly in the US, maybe there is a bit of a downside there but this is not a financial event. We do have a fiscal sustainability crisis in Brazil; we also have the same thing arguably in South Africa but these markets are a bit smaller, particularly the overall emerging market (EM) and I do not think there are global systemic risks. We do have confusion around Chinese policy whether that is stock market policy, currency policy and the ongoing conflict that how we have reform and high growth. But I see that as a source of volatility rather than a fundamental item that would drive equity markets dramatically lower.
Latha: Behind what Anuj is asking you is a fear that many people are voicing that probably 2016 global growth is going to be lower than 2015. Is that a worry?
A: That is not our forecast and if you look at the European Purchasing Managers’ Index (PMI), they have been good. The non-farm payroll printed 290,000 with an expectation to 200,000, US housing demand is okay and the US mortgage rates have not gone up even with the move by the Fed. We had export data rather than China which was ahead of expectations. We did revise modestly down our Q4 2015 GDP with some of that revision down makes it a bit easier for this year. So I do not confuse the weakness in market in the first six-seven trading days of this year with a reflection of macroeconomic events.
Last year the Chinese equity market went up 120 percent between June 2014 and June 2015, it didn’t tell us anything about the Chinese economy, I do not think that the Chinese market falling signs much better Chinese economy nor is what is going on in the US.
Sonia: How much absolute downside do you see for the Indian market if this selling continues? Is it conceivable that we could retest our previous lows which were about 21,000 on the Sensex and about 6,300 on the Nifty? Is that something that could happen?
A: The scenario which would get you to that level will go back to my earlier comments about the technical position in the H-share market and how a broader impact on sentiment towards EM. I think we have got a situation in India which is a degree of wait and see. Let’s wait for these results, let’s wait to see RBI activity, let’s see if the government can come a bit more effectively in spending money and so there is no imperative for people to put on risk rapidly. You are still going to see outflows from emerging market open ended products which is probably why you see FII outflows.
India is nothing special in that story, every other EM seeing the same story. So you could retest those lows if this uncomfortable story in China was to play out. It is not our base case but it is a risk that we need to conscious of.
Anuj: For India it has been a lot about domestic money, a bit of an equity cult developed last year because so many midcaps did well, the broader market did extremely well even though the index did not reflect that. Would that be at risk if the market sees even lower levels from here on at index level if it corrects another 20 percent from here?
A: I think the structural flow story from domestic institutions is still in place in India. This is a story about a less competition from fixed deposit rates and over a medium-term view you had a reasonable compounded return from Indian equities. What you are going to remember with flow stories is as a fund manager, if I am nervous I can choose not to invest that money that is coming in and wait for a better price and so that’s how you tend to get these down draws in market even where flows are reasonably good. I would highlight the Australian equity market here. They have incredible flows into superannuation funds. Over a time Australian equities tend to do well but you can still have some nasty down draws.
Latha: Coming back to earnings. This market lacks leadership now; the private sector banks which appeared to be better than their public sector brethren are now getting beaten down because of fears of bad loans. What will you pick as winning sectors here?
A: I am a bit cautious to read share prices telling us necessarily about relative fundamentals. What we have seen across the globe is that some of the better stocks, the market leaders have been sold off and that is what happens when you get these events, these big corrections in markets.
Clients have to sell what they own; not necessarily what the weaker stuff is because they probably do not own that. So I would not read too much into year-to-date leadership. I think you have to run a portfolio of high quality companies for now in India and you would change that if you were to move into a more dramatic monetary easing cycle, which is probably being delayed a bit with the global capital market volatility.
Latha: The Budget is near. Would higher fiscal deficit worry you?
A: This sort of question had come last year as well. It depends on where you spend the money on. If you have got high fiscal deficit because you are ramping up subsidies, you are doing activity which is populous to improve your probability of getting votes then that is a negative story for the capital market if fiscal deficit increase.
If India goes ahead and announces a whole host of attractive railway projects, is spending more money on education, on infrastructure then the market will welcome that.