Asian Regional Strategist at JP Morgan, Adrian Mowat believes that underline fundamentals are still strong in emerging markets. But he adds that India should correct by 4-5% for the markets to look attractive. His ideal is around 11,000 points.
He also says that all markets will focus on cues from US Fed.
Excerpts from CNBC-TV18's exclusive interview with Adrian Mowat:
India is under pressure like rest of Asia and emerging markets, how much more blood letting do you expect?
I think we have moved from a period of abnormally low volatility particularly in developed markets. There was a situation in the United States where the economic data and more importantly corporate profit data has been quite strong. Bond markets have gradually normalized in a consistent steady fashion with US bond yields moving higher but slowly without disrupting equity markets.
That was the period we have enjoyed up until middle of May but now the irony is that we are moving towards the end of the Fed tightening cycle and we had the last rate hike on the May 10.
One is going to see real divergence in commentators view on where interest rates are going in the US. We are going to have three things that the market is going to focus on to generate volatility.
First; core inflation in the US is right at the top of the Federal reserve comfort zone. They like to target between 1 or 2 %. If one looks at the pattern of this market, we had sell off late last week based on bad inflation data, we rallied because PBI was less than expected and we then fell because core CPI was much weaker than expected. So that was on the inflation front.
The economy in the first quarter was very strong, second quarter will continue to be strong but we see it weakening in the third quarter. So equity markets have started thinking whether inflation will move higher with economic movement slowing. And finally the equity markets are confused by the new Federal Reserve Chairman, since they are not quite sure about the message he is giving out in terms of on whether he needs to continue tightening and at what level he would need to tighten to.
So these levels of uncertainties are generating volatility in the equity market and one must remember that volatility has been very low. I see this as more of a normalisation trend as opposed to something we should be too concerned about. There is a risk building that if core CPI remains quite high throughout this year, then the Fed may need to be seen to continue to tighten.
This could be a part of the issue, also the new Federal Reserve Chairman is still trying to build his credentials and that the US effectively over tightens and that the growth in 2007 is very slow, that is what the market is fearing. But all these conversations are with regard to United States. I do not see this as an emerging market issue, neither an Asian issue.
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