It is a good year for EMs but India lags: Adrian Mowat

It is going to be difficult for India to outperform because it does not really have the significant delta of moving 67634713 67653133 67619376 from a negative to positive which some of the other major EMs have, Adrian Mowat, EM - Equity Strategist, tells ET Now. Edited excerpts:Is it all clear blue skies for emerging markets and within that for India because valuations may be expensive but the promise of growth and underlying businesses is also very strong? There are really two questions there. The outlook for Emerging Markets in 2019 is good although the numbers are different from a number of different markets. The largest EM is China. It had an extremely difficult 2018 with the MSCI China coming down more than 20%. The onshore Shanghai market was down some 30%. We had very tight financial conditions -- a slowdown in economic growth, a reduction in the overall industrial profit numbers for China in 2018 and that was reflected in the market. Looking into 2019, there are two key drivers. One is going to be a stabilisation in the economy because of policy to stimulate growth. Part of that policy to stimulate growth includes a reduction in both personal and corporate taxes. The earnings outlook for China could look very favourable in 2019 relative to expectations. The next two biggest markets are Korea and Taiwan which also performed very poorly last year because of the trade war. Most of the listed companies in Asia are vulnerable to export disruption through trade disputes. If we can get some resolution in that that will be very helpful to those markets. In Brazil the policies of the government are viewed to be pro-growth, pro-reform including privatisation. When you put these things together, the chances of EM outperforming up pretty good. The other factors were the views around the Fed and the dollar. With the Fed moving less than they did in the last 12 months, combined with less dollar strength, it will be broadly favourable for the emerging markets with current account deficits. I do not think India will be an outperformer in 2019 if China’s growth does recover and profits recover and we get a resolution in the trade dispute. India was a big outperformer last year. Positioning in India is bullish overweight within dedicated emerging market funds. It is a good year for EM but India probably lags that. In less than a fortnight from now, we will have a truncated budget event. Do you expect anything out of the box? Most people are expecting that it is going to be extremely pro-framer and a very populist budget from the government. There might be an upside surprise in that. The expectation is a politically focussed budget, targeted at policies that are deemed to be popular. Possibly if policies are more muted, then it had to be a positive new story for the market. Historically data indicate that elections years are rewarding years for Indian investors. What kind of returns can markets generate this year? My expectation is that the Indian market does go up this year but probably lags emerging markets if we get the conditions. I was talking about China, Korea, Taiwan plus Brazil. The interesting thing in India is you change the strategy that worked in 2018. In 2018, we had a big outperformance of the exporters in terms of the IT sector. We had good performance out of the more blue-chip banks. But we had significant underperformance of some of the most cyclical sectors such as autos and two wheelers. Perhaps the story for 2019 is the inflationary concerns continue to moderate, expectations around the RBI are less severe and that you also get some policies. If that comes through, then the weakness that we have been seeing in the auto and two-wheeler sector provide an opportunity to add some exposure to that. You get a little bit more domestic cyclical exposure responding to a more favourable real income story in India. If I have to look at the world through rose-tinted glasses, what if the trade war fears do not get resolved and the Fed does not tighten? Would markets which are expensive but which give durable and reasonable growth, like India or any other emerging market, have a serious scope of outperforming?I am not sure if I understand what your rose-tinted glasses are. You are telling me that trade disputes concerning China does not resolved. It does not seen very optimistic. I actually think that the balance of probability is to get some resolution around the trade dispute. You are kind of turning the temperature down as opposed to completely resolving the issue. China has got medium to long-term structural issues which will continue to cause a growth deceleration on a trend basis but 2019 might be a year of cyclical uplift. In the context of India, as I look through the EM active managers, they do on average seem to be overweight India. India was a good place to be overweight last year. It is going to be difficult for India to outperform because it does not really have the significant delta of moving from a negative to positive which some of the other major EMs have.

from Economic Times http://bit.ly/2FTRa3B