Markets

Xi statement does not mean end of trade war : Adrian Mowat, JPMorgan

In an exclusive interview of ET Now, Adrian Mowat, EM Equity Strategist, JPMorgan, says the market volatility will be driven more by statements from the White House as opposed to statements from the Chinese leadership.

Edited excerpts:
The big news this morning is Xi Jinpings commentary coming in. Would you say that fears of a full blown trade war is completely behind us?

It would be too early to say that it is the end of a trade war. In his public speeches, he has always been pro-globalisation and anti-trade wars. so there is nothing new in the speech. Nor was there any sort of new statements made about what sector they were going to open up because the statements on aviation, on the auto industry, on the finance industry have already been made previously. So, the market is still going to be in an environment where trade conflict generates volatility but the volatility will be driven by statements from the White House as opposed to statements from the Chinese leadership.

There seems to be a lot of excitement in India as China is paving the way for doing away regulations in auto and aviation spaces. Does this open the window of opportunity for trade across the region?

Remember, we have got some conflicting signals here at the moment. China has been suggesting that it will allow foreigners to own more than 50% in auto companies rather than losing to China the joint ventures. That is globalisation. There is also significant talk around tariffs for the auto industry, particularly tariffs against electric vehicle manufacturers from the US. So again, the details here is much more conflicted than a clear message of opportunities arising. You might want to push this in a bit. If China takes through globalisation, while the US is so fixated on its current account deficit, its trade deficit, that the Chinese could get greater cooperation from nations trying to defy what US is doing. But again, it is not in the detail.

Markets are really struggling with an incoherent policy, an administration that announced a large tax cut at the beginning of the year, a big fiscal deficit as well. We are talking about a budget deficit of possibly even a trillion. It could lead to a bigger current account deficit and compound the trade problems. If Trump is really fixated on reducing the trade deficit, then from the stand, it is very hard to understand how that is possible with that fiscal stance.

The banking sector issues are pretty much well documented. In the very latest move in case of Axis Bank, the term of the CEO has been curtailed which has just sent out a signal that change is very much in the works. Is there an opportunity to look at some of these names because people influence culture and if the leadership changes, then that ignites a new way of looking at things, a new perspective perhaps?

Well, the specific story around Axis Bank is very new, is not it? So, the board of directors are not allowing the current CEO to continue for the end of her term. I think it is too early to suggest that this is a fight signal. And if you go back to the global financial crisis and remember some of the issues around companies such as Barclays trying to sign a new chief executive, these things can take a while.

You would have noticed that Deutsche Bank had management changes over the weekend with some clear conflict between the advisory board and the CEO. It is dangerous to assume that you have got to the final episode of the so-called trough. You would be better off to see who the new individual is and hear what their proposals are and then make assessments at that point.

If you look at the charts for this year for the banking sector, the safe approach has been to stick to private sector banks. One of the more interesting new story today in India is that HDFC has started to push up interest rates and so we are moving against what has been a very favourable trend of declining rates for the last five years.

This may be good news in terms of net interest margins and that may reflect reasonably well in the Indian economy. We need to think about the consequences and the change in direction for consumer interest rates.

The Indian banking sector per se has clearly been mounted on the Indian retail sector growth. The retail growth is strong but do you think it is a matter of time that retail dominated banks also face the heat of a slowdown?

Yes. I think the extremes of the credit cycle which you see in the corporate sector do not typically occur in the individual retail sector where mortgage lending tends to be the dominant form of lending. Then there are credit cards and that tends to be a lot smoother. When you have a more meaningful with negative credit cycle, it is typically driven by the employment cycle and at the moment it is too early to make that sort of call in India.

The rate hike by HDFC is very much the start of cycle. It would be end of interest rate in credit cycle which would expect to see some struggling concerns.

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