We talked to leading economists and fund managers to help you make sense of what is happening in the US and how it could impact emerging economies like India. This is what Harshad Patwardhan, Executive Director and Head of Equities at J.P. Morgan Asset Management (India), had to say:
What does the tapering mean for the markets?
We believe market participants will likely take a more nuanced view of the subsequent announcement of tapering as and when it happens. Unlike the severe reaction to a possibility of tapering expressed in May, we expect market to reflect better on issues such as positive reasons behind tapering and differentiate between reduced extent of quantitative easing versus reversal in policy rates. Therefore, even in the Indian context we do not expect a severe reaction like we saw earlier.
What impact do you think the tapering could have on the Current Account Deficit (CAD)? Tapering will have more bearing on flows to finance the CAD than CAD itself. Due to various administrative measures as well as driven by improved competitiveness of exports, CAD is likely to be contained below $70 billion for the year.
Will tapering, anaemic growth and inflation cap Sensex movement till end of this year?
We believe that all these issues have been well discussed and perhaps well digested by the market. Unless there is a big negative surprise, these factors may not have a lot of bearing on the markets going forward. Further, there are indications that on a few of these issues, there may actually be a positive surprise. Moreover, there will be other important factors such as politics that will influence the market movement.
Which sectors do you find attractive and which ones would you avoid now?
IT, services and telecom look attractive at present as these businesses are experiencing positive business momentum and are likely to see earnings upgrades. We would be cautious in infrastructure and capital goods.
What is your advice to investors for current times?
We believe most of the negatives in terms of poor macro (slowing growth, high inflation and interest rates), policy uncertainty and external risks have been known for a long time and perhaps are well factored into the markets. With most market participants reconciled to so much of a gloom and doom, it is possible that any positive surprise (say expectation of a favourable political outcome) might have an exaggerated impact on the markets. While the market will still be volatile in the near term, it is important for investors to take a medium term post-elections view and ask themselves whether they are well positioned for any possible positive election outcome. We would advise investors not to be too underweight on equities and build their allocation through an SIP or STP route.