Geoff Lewis, executive director and head of investment services, JP Morgan Asset Management (Hong Kong), tells Puneet Wadhwa he expects markets in 2012 to continue to be impacted by the debt crisis in Europe. Edited excerpts:
Most equity markets, especially in India, began 2012 on a positive note. Do you believe we can carry this optimism right through 2012?
This early-year rally, to a certain extent, was caused by mean reversion. Markets sold off to levels far cheaper than their value are rebounding. Specifically, India, that was near the bottom of world equity markets last year, is seeing a strong bounce, as investors reassess their previously dire outlook for the political situation and inflation.
While we are uncertain whether the positive market trend will continue through 2012, we do believe Asian markets will outperform over a longer time.
This year will be driven by the uncertainty emanating from Europe’s debt crisis and elections in many important countries. Nevertheless, fundamentals of Asian economies and companies remain strong. Yet, valuations on regional stock markets are not reflecting that fact.
While we do not discount the possibility of another roller-coaster year, we do believe this is the environment for bolder action than in 2011 that necessitates an active management style.
Are we out of the woods as far as the US economy and problems across the euro zone are concerned?
We tend to believe the US economy will muddle through this year, growing at a sub-trend but steady rate. We also see the new longer-term refinancing operation programme a short-term saviour for the euro zone. This being said, both growth in the US economy and a solution to the euro zone debt crisis are inherently political, and thus, uncertain.
We expect Western investors, especially European banks, to experience a much tighter liquidity situation, as they are forced to deleverage. The result will be periods of high volatility in international flows and a greater reliance in Asia on strong domestically-sourced growth and regional investors.
How do you rate India against other emerging markets?
After very little growth throughout the globe in 2011 and more stagnation likely in 2012, India is likely to become more attractive. With the gross domestic product growth rate forecast to hit at least six per cent in 2012, investors might be drawn to this high-growth country in a low-growth world.
While inflation and political turbulence hampered the India market in 2011, those issues are slowly being resolved.
The inflation rate, including for food prices, has finally begun to fall, which allowed the Reserve Bank to pause its monetary tightening stance. As inflation slows down further, interest rate cuts are likely to happen. We believe a monetary boost could counteract a lot of the current negative sentiment about India.
What’s your investment strategy in the current environment?
While we remain uncertain about the medium-term global economic outlook, given the ongoing European debt crisis and tense political situations in a number of regions, we do think periods of relative calm should see Asian and emerging equity markets rebound.
During recurrent panics in the second half of last year, valuations on many Asian stocks became unreasonably cheap. We are seeing a mean reversion, as investors move away from dire pessimism. Specifically, we think China and India — last year’s underperformers — will perform well in the short term, drawing capital away from Asean markets, last year’s outperformers.