Mumbai: Adrian Mowat, managing director and chief Asian and emerging market equity strategist at JPMorgan Securities (Asia Pacific) Ltd, an arm of the US-headquartered bank, expects local investors to strongly benefit from the current stock market meltdown, and emerging markets to attract a premium for growth after the current crisis ends. Mowat says foreign institutional investors (FIIs) are selling stocks cheap to local investors. Domestic insurance companies are big buyers in the markets, and the mutual funds, which are also buying from FIIs, will profit from any upward move in the markets. Edited excerpts:
What will be the theme after the dust settles?
The story of this recession will be back to basics and back home. Basics will include keeping away from instruments such as derivatives, high-risk markets and assets. Earlier, investing in assets was for return on capital. Now, after the crisis, the big question is: will the capital be returned? JPMorgan is forecasting the biggest recession in the US after the Great Depression. Japan, too, is facing recession. The Europe is facing cyclical economic headwinds. There is a shock for anyone who has been living beyond means.
Positive note: JPMorgan Securities’ Adrian Mowat says that there is a need for both monetary as well as fiscal measures from policymakers. Ashesh Shah / Mint
Does back home mean localization in global financial markets?
Yes, there will be a going back home phenomenon. For example, Indian banks will be more comfortable lending to Indian companies and it will be the same case in most countries.
How important is the impact of the US presidential election on short-term sentiments?
There will be an immediate boost in sentiments after the new president is voted, as people will briefly feel more optimistic. The event will not be very significant for equity markets or global economy, which is fighting a large crisis. There is very little flexibility now for the US economy. The new president will inherit an economy in deep recession—a challenging mandate.
In terms of policy support, do you expect fiscal measures?
We need both monetary as well as fiscal measures from policymakers. Initially, policymakers were slow and because of that, the confidence has been damaged. Fiscal spending from the government will help improve confidence. Cutting taxes is a more effective way, but in India only (a) small percentage (of people) pay taxes. Also, implementation of policy in India can be inefficient. The policy, however, will be pro-growth.
After the commodity complex breakdown and steep price fall in equities, does India look better?
There is no significant change in India as an underweight (market). Economies with current account deficit will also have to contract. In India, the (credit) momentum is very weak. On the retail level, banks have cut down on car loans, property loans. There could be lot of non-performing assets with the banks.
The WPI (Wholesale Price Index) is still high and (the) rupee is weak. Lower price of oil does not immediately help lower the inflation. Wage inflation is changing; campus pay offers are relatively low. The crop in monsoon is a big decider. It will have the biggest impact on inflation.
Current account deficit, fiscal deficit, efficiency of fiscal spending, credit quality are all worries. On an absolute level, the price is discounted (in markets). However, if you refer to other emerging markets, then the Indian markets still remain expensive.
Will increased liquidity in the local financial system help Indian firms?
The availability of credit is still very poor. Earlier, the ECBs (external commercial borrowings) had helped reduce the cost of borrowings for companies. The replacement cost for these borrowings will be very high. But luckily there are no ECBs maturing in the next 12 months. Governor Reddy (former Reserve Bank of India’s governor Y.V. Reddy) should be given a lot of credit for limiting external credit.
Will positive cyclicals, including low commodity prices and interest rates, help create another boom period for Indian equities? Will foreign institutional investors participate in this cycle?
Yes, the positive cyclicals will definitely help. Maybe there could be some fiscal spending from the government which could also help. Over time, risk appetite will be built. There will also be reduction in earnings expectations.
A recovery in the economy should come after the first half of 2009. Equity markets will discount this positive change after the first quarter. Eventually, some of the foreign capital (which went out) will return as people begin to buy emerging markets based on fundamentals. FIIs are selling stocks at cheap prices to local investors. As the Indian economy comes stronger from this crisis, the local investors will strongly benefit. The local insurance companies are big buyers in the markets and the mutual fund industry is also buying from FIIs.
Sensex slumped 40% in October and has since gained about as much from the bottom. What is the short-term outlook?
The immediate outlook is unpredictable, as (was) the case in October. It could go down sharply or move up sharply. However, India’s index will underperform emerging markets during the initial phase of recovery. Companies will have to adjust to the new credit environment and investors will have to adjust to lower earnings. Structurally, India remains one of the best investment story globally. Overall, this crisis is good for emerging markets. As things settle down, the emerging market growth premium will become more apparent and investors will take decisions accordingly.
How will the recovery be in Bric (Brazil, Russia, India and China) markets? What is the hedge fund strategy in this region?
The Bric (nations) mandate had worked well earlier, driven by simultaneous rise in equity and commodity prices. China will recover first and India will follow.
Brazil will recover later, and then perhaps Russia will also recover. For the hedge funds playing Brics, we recommend long China and short India.