The macro environment is still not constructive for corporate earnings: Tai Hui

Tai Hui, managing director and chief market strategist, Asia, at JP Morgan AMC believes that the rally in global equity markets has still a long way to go. In an interview with Nitin Shrivastava, he says that on a relative basis, the Indian currency is quite undervalued but this may not change soon on account of structural issues. Also, he is conservative on Indian equities at this point of time as the economy and earnings still have to show improvement.

What’s your call on equities right now?
We are quite optimistic on world equities over the next 12 months. The reason being the global growth environment has improved a lot, though structurally we are not yet completely out of woods. If you look at the US, the deleveraging process has come a long way, similarly in Europe, a lot of tail risks have reduced and even some of the European growth data numbers have turned from negative to positive. Even if one looks at flows into the US mutual fund industry, position-wise, this rally still has a long way to go.

Which emerging markets are expected to do well next year?
Among emerging markets, we have seen quite stark performance with China and Korea outperforming even the US markets last quarter while the markets like India and ASEAN have lagged, highlighting that differentiation has now become quite important. We are bullish on Taiwan, Korea, Singapore and Thailand as they have a strong export base to the US and Europe, have no current account deficit (CAD) issues which in turn means currency is more resilient, valuation-wise also, they are trading below multi-year averages.

What do you make out of macro environment in India currently?
Economy seems still decelerating as there have been no concrete signs of bottoming-out whether you look at indicators like GDP, construction or investment data.  At the moment, there are still limited upward momentum in the Indian economy. A stronger global economy would help, but given relatively low export to GDP ratio, the external boost could take longer. That is one reason why I am more conservative on Indian equities because macro environment is still not constructive for strong corporate earnings growth. Also, with inflation at relatively high level, corporates that are struggling to keep costs down are facing a double whammy. Meanwhile, political development also means business investment could be delayed until we see greater clarity in the next government.

Between India and Indonesia, which one would you prefer?
We are slightly more positive on India than Indonesia. Though both of these countries are domestic driven economies, suffer from high current account deficit issues and have experienced huge currency volatility, the one factor which makes India more attractive is that both equity markets and currency in many metrics are highly undervalued while in the case of Indonesia, the markets and currency are fairly to slightly over-valued. The rupee seems quite undervalued both in terms of REER (real effective exchange rate) and PPP (purchasing power parity). But it doesn’t mean that it will appreciate suddenly, but the magnitude of depreciation from here on is less. The rupee may continue to remain under pressure in the short term due to its structural CAD issues which is likely to correct gradually.

Your call on tapering?
We had expected the Fed to hold in October and December because of the uncertain impact from the government shutdown as well as looming showdown of a potentially another round of shutdown in mid-January. Now, we need economic data to slowly improve in order to build up the condition for the Fed, especially under the likely-chairmanship of Janet Yellen starting in March 2014, to bring QE tapering back on the table. Meanwhile, we could still see the market making opportunistic, tactical bets on the market.

What’s your outlook of FII sentiment and market direction from here on?
FII flow has become healthier as a result of cheap equity valuation and delay in Fed’s tapering. However, underlying earnings have yet to make an improvement which implies the market is still vulnerable to global market volatility and capital flows.