Adrian Mowat, MD and Chief Emerging Market Strategist, JP Morgan, spoke to Priya Kansara Pandya and Krishna Merchant on the markets.
 
How does India stack up among other emerging markets including China?
 
The emerging markets have had relatively robust growth after the impact of financial crisis receded and have rebounded faster than the developed world. India has been right in the middle of such high growth.
 
Though it will run on high current account deficit (CAD) to drive such high growth, I think it is easy to fund the CAD in current environment. Capital is being attracted by India’s growth despite very high inflation here, which I think is still manageable and is better than deflation.
 
Thus, India looks attractive and we expect it to grow faster than China next year. And the clear indicator of this is robust order backlog of engineering companies, which reflects the economic activity happening in next couple of years.
 
On the other hand, China is moving away from its traditional policy of fixed asset investment and moving towards pushing consumption.
 
But don’t you think it is all reflected in India’s valuations versus other emerging markets?
 
India is trading at high valuation, no doubt. But this is inevitable as bulk of Indian market is also offering high growth. When growth is scarce elsewhere, you have to pay a valuation premium.
 
Thus, when compared to history, the valuations look expensive but when compared with relative opportunities, I think they are attractive.
 
What are the risks you perceive?
 
India’s continued outperformance over other emerging markets is not so much of concern to us as much as stubbornly high inflation here. We are watching out for Reserve Bank of India’s (RBI’s) reaction to inflation data. If core inflation keeps rising and this is followed by strong credit growth, then we fear more aggressive rate tightening.
 
However in the short term, our expectation is that interest rates will go up less aggressively.
 
People are talking about correction in the Indian markets. What are your reasons for the same?
 
China is curbing its production because of change in its policy away from fixed assets investments. Thus, we see curbs in production in steel and cement in second half versus the first of this calendar year. This will be a shock to the commodity markets and thus we will see a big correction in commodities.
 
If that happens, financial investors who have made strategic allocations to commodities in last few years by leveraging will push the redemption button in a big way. As a result, even BRIC funds will face huge redemptions and that will affect the Indian equity markets. For all this to become a reality, we need a confirmation on weakness in China’s commodity demand.
 
However, correction in the Indian markets will be more of a technically financial event rather than a fundamental one, and I see more of buying opportunity. 
 
Fundamentally, it will only help India as inflation will come down followed by lower input costs and consequently current account deficit will also come under control, which is highly positive event for India.
 
Will the Foreign Institutional Investors (FIIs) continue to invest at the current pace incrementally even at India’s higher market levels?
 
India will continue to attract FII money at an accelerated pace for the simple reason that growth is in short supply globally. Relative growth of India is better than the rest of the world.
 
Which sectors you like and dislike at the current juncture?
 
I like the banking sector as it will be the biggest beneficiary of the robust capex cycle of Indian companies.  I also like the frontline IT companies due to their superb execution track record and their performance even in tough market conditions.
 
Even engineering and construction companies are expected to benefit due to the robust infrastructure activity in India but investors need to watch out for their execution progress.
 
I would advise to stay away from energy and commodities sector, which according to us is prone for a correction.