“From a markets perspective, we have priced in aggressive rate hikes across every EM Asia economy with the sole exception of Taiwan and in large markets like the US, we have now priced in four rate hikes by the end of 2023,” said James Sullivan, Head of APAC Equity Research at JPMorgan in an interview with CNBC-TV18.
“So that rate hike cycle is already largely priced into markets. The flip side of that is you are finally starting to see this rotational trade away from the goods portion of the economy and into services. This rotational element of global growth is a very important part of the inflation conversation,” he added.
According to him, there are three overarching drivers to the bullish call on Indian financials.
“Number one, from a global perspective - the bullish financials call is not an India specific conversation but a part of our global view on markets right now. For more India's specific views - number one, the Indian markets had a great run, it's up over about 150 percent off its lows in May of 2020. So it's really stellar performance for the Indian market as a whole. It's hard to make a short term valuation argument for most segments of the Indian market," he said.
"The final and third component to the conversation really deals with the underlying bottoms up fundamentals of the Indian economy,” he added.
A moderation of dollar strength is expected moving forward, which again is extremely important for emerging markets.
“When I look at the rate hike expectations - we have to differentiate between goods inflation and services inflation, more than 100 percent of global inflation on a year to date basis has been driven by goods inflation, as the consumer starts to reengage, starts to spend on things. Incrementally, as economies open up, they will increasingly spend on experiences, on services that will be the next leg of global economic growth. And that's one of the many reasons why we see this inflation surge as holding back retail spending from a short-term perspective. But we do not see this as endemic moving forward, we are not concerned about medium-term inflation relative to current expectations,” he stated.
In terms of preferences within the Indian markets, JP Morgan believes it is a balancing act.
"One of the things that we're watching very closely as we go through the Q2FY22 earnings cycle in India right now is the degree of cost pressure that companies are able to push through to the end consumer. In certain segments, particularly consumer discretionary cement, we really don't see that ability to push up pricing aggressively, in which case, we feel as though the companies will have to take the hit to profitability to continue to drive that top line," said Sullivan
As we move through the second quarter earnings cycle, the sector where JPMorgan estimates are most above the street are the financial sector and consumer staples space.
"We do see weakness in steel. In our view, that's largely driven by seasonal, not structural weakness, but we still need to see strength in broader base metals.” he said.
For the full interview, watch the accompanying video
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