Adrian Mowat, JPMorgan Chase & Co.’s emerging-market strategist, comments on the outlook for the Indian stocks. He spoke in an interview with Bloomberg-UTV.
The BSE India Sensitive Index jumped 3 percent to 16,524 at the 3:30 p.m. close in Mumbai, the biggest gain in almost a month. The gauge lost 6.1 percent in four sessions before today.
On U.S., Europe:
“There are very significant risks to capital markets. We have a formal 40 percent probability of a U.S. recession. In the U.S., there is 1 percent growth and 3.8 percent inflation. These are times I’d like to call stagflation.
‘‘The Fed announcement last week highlighted very little monetary flexibility. The virtual war between republicans and democrats are making chances of fiscal stimulus extremely low. European crisis is building momentum. It’s extremely difficult for northern Europeans to subsidize problems in Eastern Europe. There are problems within ECB where senior Germans are leaving ECB. It’s a difficult idea to sell to the Germans.”
On emerging market equities:
“Our preferred asset is the U.S. dollar. Emerging-market stocks may have good fundamentals but they’re owned heavily by international investors. We are in the second stage of a bear market. ASEAN sold down heavily in spite of good fundamentals. People are trying to lock in profits before they evaporate. This will continue until some sort of resolution of Europe’s crisis is reached. India and China, where inflation is high, will deal with it by maintaining tight monetary policy. They will prepare for a slowdown in growth rather than not fight inflation at this time.”
On commodity prices:
“Commodity markets are still in a state of denial about what is going on. They are far too bullish on global growth and they are very naïve what is happening in China. The decline in commodity prices is a real possibility. There is stagflation in the U.S. A sharp decline in commodity prices is the best thing that can happen to us and the European consumer. It will boost real income. I see the decline as a good economic event, even though there will be pain as commodity prices decline.”
On India strategy:
“My strategy is to hold U.S. dollars. If we get a fall in the commodity markets we will raise interest in current-account deficit markets like India and Turkey.
‘‘India is a current-account deficit economy, which needs capital to flow to everyday. Market expectations are extremely low on politics, earnings and hopes of inflation coming down. I expect Indian markets to be declining.
‘‘India valuations will stop declining once growth slows down. The current market scenario in India favors defensives like staples and telecom. We will look at buying interest rate sensitives when monetary tightening eases.’’
On central bank action:
‘‘Our expectation is of a further increases in the repo rate in the next few quarters. The Reserve Bank of India is concerned about stopping inflationary pressure. They have a limited influence in the economy. The RBI can’t address the official deficit as long as types of deficit-expanding schemes like the rural income schemes continue.’’
On outlook for the rupee:
‘‘The rupee will continue to sell-off as the RBI has a policy of minimum intervention. This is about capital protection at a time of heightened inflation, and not a reflection of the fundamentals.’’