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Has the US government been able to assuage concerns and calm the markets regarding the fiscal cliff concerns?
The sequestration kicked in on March 1 as the Republicans and Democrats failed to reach an agreement and the economic impact is likely to be felt in the near term. However, the market reaction has been somewhat limited since the deadlock has been clear and investors steadily dial down their expectations of an agreement being reached. Public finances and the politics around it could continue to impact US economic recovery, even though there are some bright spots in the economy, especially housing market recovery.
How do you read the situation in the US and Europe? Has the global rally in risky assets fizzled out? What about China and Japan?
The momentum in risk-on rally has been fierce since the end of 2012 and the first two months of 2013. The recent consolidation represents a reality check (especially on Europe) and this is perhaps healthy. The market has probably gone from too pessimistic in 2012 to very optimistic on the economic environment. This will probably be checked in the near term.
The Japanese market has done extremely well due to policy expectation, but one should be realistic that the government's target to revive growth and bring back inflation will take a very long time.
For China, growth is recovering, although only in a modest fashion. The 12-15 per cent economic growth period is behind us and instead real GDP (gross domestic product) growth of eight per cent will be more common. Policies are still being rolled out to cool down the property market, which could undermine market sentiments.
What is the mood now among foreign institutional investors (FIIs) as regards India? Have the recent Union Budget and the economic growth projections made them rethink their India strategy?
India has been very well received by international investors, with almost $8.5 billion of net foreign purchase in the first two months of the year, compared with a total net purchase of $24.5 billion in 2012. Beyond the Budget, investors are also looking at the potential for bottoming of earnings expectations. Attractive valuation has also drawn foreign investors' interests to this market.
Has the Budget done enough to spur growth and avoid a ratings downgrade?
Spending increase could obviously add some momentum to growth, but the revenue growth target, which is supposed to keep fiscal deficit at a manageable level, has been prone to slippage. So, this is an area that rating agencies will be focusing on in the near-term.
Meanwhile, one should not be disappointed that there is a lack of announcements over major reforms. Partly we are approaching a key election next year, but also the Budget is not necessarily the best venue to announce major reforms.
What would you expect the equity market to absorb from these developments over the medium term? What are you advising your clients at the current juncture?
Not just for India but for the region as a whole, investors should look to gradually increase their exposure to equities. There is also a need to diversify away from home bias into investing in overseas markets. Purchasing power of cash, despite high domestic interest rates in India, is eroded by inflation, despite high deposit rates.
How do you see the bond markets panning out over the medium-term, given the rupee and the interest rate scenario?
India is somewhat unique in this sense that its central bank is still in rate cut mode, whereas for other economies in Asia, central banks are nearly done with loosening and modest tightening is on the cards later in 2013. This is good news for government bonds.
However, room for credit spread compression in this region is increasingly limited and hence, the return proposition of Asian fixed income market will move from the coupon and forex appreciation.
The tax residency certificate (TRC) Section 90 and 90A have been amended in the Budget and had resulted in panic selling. Do you see anything else in the fine print that could scare the FIIs away?
Following the clarification from the government, JP Morgan Asset Management India believes TRC is no longer a big issue from the perspective of FIIs. High current account deficit and potential big currency movements remain important factors from the perspective of foreign investors.
Which sectors in India appear investment-worthy right now?
Industrials and infrastructure sector look interesting as many stocks appear to be pricing in the worst but clarity on triggers for improvement is lacking. With policy rates starting to trend down, JP Morgan Asset Management India believes the interest rate-sensitive stocks are likely to do well, particularly where valuations are undemanding as in the case of state-owned banks.
On telecom, while supply-demand dynamics are looking better, regulatory overhang is not completely out of the way. As high current account deficit makes India vulnerable to big currency movements from time to time, exporters look interesting, too.
