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| 'India will hold on to today's valuation level' | | Q&A: Adrian Mowat, Chief Asian & Emerging Markets equity strategist at JPMorgan, Asia Pacific |
| Shobhana Subramanian / Mumbai Nov 17, 2009, 00:29 IST |
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 Adrian Mowat has tracked emerging markets for nearly two decades. The Chief Asian and Emerging Markets equity strategist at JPMorgan, Asia Pacific, believes these markets should continue to see inflows as they will grow faster than the rest of the world. And, that the Indian market will probably be re-rated over the next 10 years. Excerpts from an interview with Shobhana Subramanian:
Would you agree that the worldwide rally in the markets has been fuelled by liquidity?
Liquidity is a poorly-defined concept. Availability of cash does not guarantee that risk assets will rise. Investors’ perception of risk and reward is key. In 2008, risk appetite collapsed and investors sold equites, corporate bonds and other risk assets. The proceeds went into cash, even though dollar interest rates were zero. The catalysts for the rally in equities from March 9 were a stabilisation in US retail sales and better news on inventories. From that point, the markets have climbed a wall of worry.
Next year will be all about monetary stimulus in the US. People are confusing the central bank with monetary and credit conditions. In 2008, even with a zero interest rate policy, credit was not available for the real economy. In 2009, credit markets have rallied. This suggests to us that the main conditions for a monetary stimulus to work will be met: availablity of credit at attractive prices and greater confidence. No, I do not expect the US consumer to borrow; rather, he will pre-pay smaller amounts of debt than this year.
So, do you see flows into emerging markets sustaining?
Yes, because growth will definitely be higher in emerging markets and economies like India and China have survived the stress test. The decoupling debate is settled. It’s not necessary for emerging economies to have strong demand from western markets; it’s China, India and Indonesia that have led the global recovery. The rest of Asia followed. And China is as large as Japan in terms of nominal GDP at current exchange rates. Local markets have generated a recovery; in India, car sales and property sales indicate robust consumption. The risk premium for emerging markets should now be lower.
Would you say the re-rating of the Indian market is over? What multiple do you expect the market to trade at in the next 10 years?
India saw a big re-rating post the election results in May this year. The market (MSCI India) now trades at 17 times the 12-month forward earnings whereas emerging markets trade at 14 times. So, India trades at a fairly high premium and it deserves the premium due to high growth and high RoE (return on equity). The 10-year average multiple for India is 14, but this average includes the low-growth period earlier this decade. I think India will maintain today's valuation level.
What do you make of corporate earnings in the September 2009 quarter?
In initial stages of a recovery, you typically do not see strong top lines. Profits increase due to cost reduction. Car and property sales indicate consumer confidence and activity. So, the next stage of the profit cycle, driven by growth in top lines, is starting.
Will tightening by central banks hurt growth?
We believe central banks will use moral suasion and other means to check asset bubbles rather than simply raising interest rates. For instance, in India, banks are being advised to increase risk weights on real estate loans and in some countries the loan to value ratio is being lowered.
Which are the emerging markets that you like?
Within the emerging markets, we are overweight on Russia, Taiwan and India, and underweight on China, which accounts for 18 per cent of the market capitalisation of emerging markets. You see credit markets are easing but China doesn’t need capital. So, you’re more bullish on India when credit markets are easing. India’s access to global credit has improved. India typically runs a current account deficit when it grows, so it needs to source capital at an attractive price, which is happening for both equity and debt.
How do you view the surge in gold prices?
We have studied gold prices and found that over 260 rolling periods of three years each, only on 110 occasions, or about 40 per cent of the time, have the real rates of return been in excess of US inflation. So, there is a less than even chance of gold providing a hedge against inflation.
How much of the $13-14 billion that has come into India this year, would you say, is hedge fund money?
The bulk of the money would have come from long-only funds. Hedge funds haven’t actually been investing too much because they’ve been concerned about volatility and also the ability to hedge in India is lower than, say, in Brazil.
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