Monday, November 19, 2018

India’s return a story of currency recovery: Adrian Mowat - economic news of india - world economic news - economics news for students - indian economy news

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India’s return a story of currency recovery: Adrian Mowat
India is definitely the biggest beneficiary of a decline in oil price throughout the emerging market complex, Adrian Mowat, 66687219 66688831 66688655 EM - Equity Strategist, tells ET Now.Edited excerpts: Why do you think some of the crowded trades in the world like US tech stocks, crude, dollar index are suddenly challenged? This really goes back to what happened in the bond markets in September. We had a big move up in bond yields in September. This sort of volatility shock went through risk assets and that is still playing out with some heavily owned positions like tech. We have also had some very specific issues in tech. Apple has come out with disappointing guidance around the i-Phone. A very favourite tech name Nvidia which produces graphic processing cards, it came out with very disappointing results, some guidance about excessive inventory. So, you have got both the unwinding of a crowded risk trade as well as some stock specific issues hitting tech.Then there was the correction in the other risk trade which was being long on energy and commodities. The energy prices came off very hard. It has come off hard because of fundamentals. Inventory levels are very high. The second is that the US has provided some sanction waivers that have allowed the major importers of Iranian crude to keep on importing for the near term. So, the unwinding of those two big risks trades made them less attractive. Do you think the entire change in policy stance by global central bankers is in the price? Or would that continue to add an extra dimension of volatility? I am not sure if I would say that there is any real change in central bank policy. The Fed has been on normalisation path for a period of time. Some of the statements by the Fed governors that happened in September probably did cause the bond market to wake up to the fact that we are on a normalisation path. We are already seeing no change out of BOJ or out of ECB. So, perhaps Powell’s statements in September caused the bond market to move and that big move rippled through all risk assets. But I do not really see it as a policy change. It is steady in terms of policy but perhaps people have been reacting to a strong US economy and a tight labour market. Crude has cooled off quite significantly from where we were at about a month or so ago. Liquidity flows are coming back. FPI flows month to date are net positive. Earnings have been in line. Do you see a meaningful earnings recovery coming in Q3 in India? No,I do not really see any drivers from earnings but is one very important macro driver for India. It is definitely the biggest beneficiary of a decline in oil price throughout the emerging market complex. What this means for India is that a lower current account deficit, less pressure on the rupee and less pressure on interest rates. As we look into 2019, the risk around rising inflation gets moderated by this. I would view this as positive for India.If you look at the composition of the Indian market particularly on the largecap side, you do have beneficiaries of a weaker currency and ironically they may benefit less from this move in oil. It is perhaps also a good signal for a change in the sector movements within India. This year. the smart thing to have done was very overweight exporters. You need to start reducing your exporter exposure and start to think about some more domestic cyclical names that might benefit from an easier macro environment in 2019. It may be a path-breaking deal for the aviation sector if the Tatas take over Jet and merge it with some of its current businesses. What is your view? If the Tata Group can acquire Jet Airways, I would view this as broadly positive. Indian airlines was originally set up by the Tata Group and that would be viewed as a positive. For me as a strategist, it is always very difficult to have a strong stock specific view particularly on M&A type, bankruptcy type situations which tends to need the skills of an analyst as opposed to a strategist.Every time the rupee has depreciated more than 10-15%, if you buy into stocks, you end up making double digit returns. If you are a foreign investor, should you be tempted to buy this macro scare rather than running away from it? I would concur with that. The story for EMs in 2018 was one in which you had rapid move in US interest rates and a very strong dollar environment. That was a tough environment for capital flows into any other currency but the dollar. It came through more powerfully in EM forex. We have also had a slowing Chinese economy and a very major move in the renminbi which has historically been quite a strong currency. The bull case for 2019 is that an oversold EM FX begins a modest recovery which will add to the international investors returns. If you have also get a strengthening currency, less fear around inflation and perhaps less fear around higher domestic interest rates in EM, that will be bullish for the equity markets. I completely agree with your proposition here that India’s return is going to be partly a story of recovery in currencies.Why are markets currently not focussing on what potentially could snowball into a big risk-off event or a big fear in 2019-20? Yes, there are a number of issues to look at here; first, if we look at the US economy, the labour market is very tight and wages are rising. If we move to a situation where the Fed’s focus becomes price stability rather than having a balanced focus, that would be very negative for US equities and that would have an impact on global equities. The Chinese economy has been slowing, some of the high frequency data is very disappointing. It specifically highlights year-on-year decline in car sales. There is also weakness in the property market. The Chinese authorities have begun to ease. The first thing we need to see some stabilisation and then perhaps an acceleration of the Chinese economy mid next year. If that does not comes through, then that will be a negative for emerging markets just because of the sheer scale of China within emerging markets. The final thing is whether there is an escalation in the trade war. To date, the US has not imposed significant sanctions or tariffs on the tech sector. If they were to do that, it would be very negative for the supply chain in Asia where large EMs such as Korea and Taiwan have a significant proportion of their equity market in tech companies. Those are the three things that I would focus on as key 2019 risks. What about the outlook on interest rates puncturing the momentum that we are seeing in global growth? We have already had the IMF lower global growth rate. How much of a risk does that pose? I would repeat what I said before. I am worried about the tight labour market in the United States and whether the Fed ends up moving more than what is currently discounted in the markets. That would be the main area I would look at. As I look throughout emerging markets, this has been probably a disappointing year for EM economic growth. It does not feel like an environment where I am going to be too worried about rising rates. There may be some specific issues in the European bond market around Italian government bonds because of the fiscal dispute between the European Union and the coalition government in Italy, but I do not broadly see higher rates as a big issue with the exception of United States which clearly is an important reference rate. In the past you have talked about financials, IT and even pharmaceuticals as a theme. What should investors do now considering from now till June-July next year, there will be an added domestic overhang of elections? Should investors keep some powder dry? It is difficult making capital market judgments around election cycles. The best base case is the continuation of current macroeconomic policies without any big political surprise. If we do get market volatility, it is far more likely to be what we have just experienced in October rather than a specific political issue. With regards to sectoral performance, I am very nervous to make any statements as a strategist about financials. If you look at performance over the last months, there is ICICI Bank which is a top Nifty performer and right at the bottom, there is Yes Bank. I feel, all the financials within India are being battered by some stock specific issues. We have clearly got a very large issue around a major NBFC. There are still some concerns about liquidity risk within the financial system. If I have got a big call to make during this interview it is that think about this change; oil has come down, the pressure on the rupee has weakened and so your overweight position in exporters which has served you well, is probably not going to outperform as it has in 2018. You need to start rotating into some domestic names. That will be selective banks but maybe one needs to start thinking again about some of the fast moving consumer goods (FMCG) companies which are expensive. But they were threatened if inflation was going to be high next year with the higher oil price and the weakening rupee and maybe then I would start looking at some of the two-wheeler and auto names if the consumers are under less pressure which they should be with a firmer rupee and less pressure on the oil price.
Source: ET
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