, chief Asian and emerging markets equity strategist and managing director JP Morgan Securities (Asia Pacific). Excerpts from the interview Many thought the Indian markets may be decoupled from the US. But, we are witnessing the largest fall ever. What are the reasons behind this?
The evidence of decoupling is hard to find. The correlation during corrections is high across asset classes and geographies. This is both a source of volatility and opportunity. The current decline is the seventh sharpest fall in emerging markets since the bull market started in 2003.
In September, we had noted, "Equity markets in our view are in a state of denial, taking too much comfort from pre-credit crunch economic data and a belief in the central bank." We are no longer in a state of denial. The key risk, in addition to the OECD economic concerns, is the fear of a Chinese policy mistake.
As noted by Jan Loeys, JPMorgan's head of global asset allocation and trading strategies, "Markets are now close to being fully priced in a US recession as the HG credit spreads are at recession levels, Eurodollar contracts are pricing in a funds rate near the rate of inflation (typical of recessions) and the drop in US equities is close to normal for shallow recessions. Little may thus be gained from recession trades. It is too early for recovery trades, though, as the current recession valuation is normally seen only near the end of a recession. There is still a lot more "bad" news in the pipeline and this would hurt the recovery trades. We are thus defensive and biased towards recession trades. This includes longs in bonds, curve steepeners and underweights in credit."
At Friday's close, MSCI EM was 16 per cent below its 52 week high, which is in consonance with the decline in global equities. This correction is unusual, as it has been led by MSCI China, which was 30 per cent below its 52 week high on Friday. There have been rising concerns over inflation and growth in China. In contrast, Russia and India were within 10 per cent of their 52 week highs.
The news flow from China has been negative. The November inflation, at 6.9 per cent oya, was at a 11 year high and the non-food CPI was a more modest 1.4 per cent oya. The fourth quarter GDP has slowed at an annualised rate, but is still +11 per cent oya.
Investors have been unnerved by the impact of administrative measures designed to moderate the fixed investment growth and prices. To add more colour to the impact of a Renminbi at 6.3, the average Chinese bank EPS HK dollar-translated 2008 growth would accelerate from 37 per cent to 58 per cent!
China Mobile's RMB 2008E EPS growth of 33 per cent would translate into 54 per cent HK dollar EPS growth. This provides a significant cushion if slower Chinese growth leads to a reduction in 2008 RMB EPS forecasts.
But, what's your view on India?
We have downgraded India to underweight. The country's 12 month forward PE is now at a 65 per cent premium over that of MSCI EM and 35 per cent over MSCI China.
The premium over EM has a standard deviation of +2 from its long-term average. India is down 10 per cent from its 52 week high, while MSCI EM has lost 16 per cent. We still believe in the Indian growth story, as we do in other emerging markets. But as seen in China, the belief in decoupling is fickle. The limited number of stocks that have supported the recent rally in India, make equities vulnerable to profit taking.
Where are emerging markets placed amid the spreading credit crunch?
Emerging markets are generally net savers and thus well placed in a credit crunch. The western banks are being recapitalised with emerging market capital. India is not a net saver; it runs a current account surplus which needs to be funded. This makes it a higher risk market in a credit crunch.
Do you think the correction is over or could we see some more downside?
I think the correction in emerging markets is overdone. But momentum and sentiment are very negative. So we could continue to overshoot on the downside. India may fall further than other emerging markets as it considerably outperformed till date.
How far do you think some big primary market issues have been responsible for this situation?
India is falling in sync with a global equity market correction.
With another Fed rate cut in the offing, what impact will it have on emerging markets particularly India?
A Fed cut of 75 bps or greater is required to positively surprise the market.
What could be the main dampeners in the Indian market this year?
Loss of confidence in the India growth story, which makes the current account deficit more difficult to finance.
How does the scenario look in India right now? Which are the attractive sectors?
Wait for the dust to settle before identifying the sectors that will lead the recovery in the market.
Where are the markets headed after this deep slump?
We remain bullish on emerging markets in 2008.
