‘Brexit, US elections are big risks in Q2’

Global markets are still nervous though some of the emerging markets like China and India are witnessing positive traction on the back of improvement in economic fundamentals. Speaking to Bloomberg TV India, JP Morgan’s Chief Asian and Emerging Market Equity Strategist Adrian Mowat said earnings in Asia will be better that those in Latin America and Eastern Europe.

Where do you see the global markets heading in the coming days?

Quite a lot of things are going on. We had a recovery from mid-February lows. The recovery was led by some of the markets that had fallen the most and the nations whose currencies had fallen the most. So you saw Latin America and Eastern Europe, especially Russia, outperforming. Markets like China and India are lagging. As we move beyond short-covering and rotation trade, the next stage is going to be about earnings, particularly a turnaround as you go into late third-quarter. Third-quarter net revisions typically will turn six months after the markets turn. I think if we are going to talk about earnings, it will probably favour Asia over Latin America and Eastern Europe.

What we have been seeing in markets like China and India is evidence that the economic data is beginning to improve. Our highlights in India will be cement sales and truck sales. In China, in the case of some of the deeper cyclical sectors, the rate of contraction has slowed. So I think the macro data looks better in Asia, in countries such as India and Indonesia, which are also seeing a move into an easing cycle. The fundamentals and earnings are improving. And I think this will help the fundamental story in Asia and within emerging markets. However, there is a fair amount of risk as we go into the second quarter. We have some global political risks, particularly with regards to Brexit in UK and how that might undermine the confidence broadly in Europe. We have major primaries and caucuses in the US on June 17 and the market is nervous about the combination of Bernie Sanders and Donald Trump in terms of what that would mean for global corporation and trade. So I think local fundamentals improving and some of the global risks increasing will be seen in the second quarter.

In countries like Malaysia, investment by provident funds or sovereign wealth funds like Khazanah almost drives the markets. In India, we have a National Pension System for almost a decade. We wonders where all this money is going because it does not seem to be bringing stability or push to the market… Well you have bond yields around Asia falling to a lesser extent than in India. So I suspect that is where the money is going. There are restrictions on the ability to buy equity through provident funds. So I think they tend to be biased by fixed incomes.

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