Upbeat about the Indian economy, expect trade deficit to come down: Adrian Mowat, JPMorgan

In an interview with ET Now, Adrian Mowat, Chief Asian Emerging Market Equity Strategist, JPMorgan, shares his views on the US debt deal, emerging markets and some sectors. Excerpts:

Nikunj Dalmia: Finally, we have a deal in place in Washington, but do you think the debt deal means precious little for financial markets because all US lawmakers have pushed the can down the road?

Adrian Mowat: Yes, it has a limited impact on the financial markets. Today the markets are up, but they are up only modestly because most investors assumed that a deal would be done on the final hour which is pretty much what has happened and this is a degree of kicking the can. In January, we will need to readdress these issues once more.

I suppose some of the fringe elements of the Republican Party are expected to lose in this debate and maybe they are not going to use this sort of blackmail tactic again in January, but we will just have to wait and see. So for now, this is no longer a new story, but maybe it will be a new story by the end of the year.

Nikunj Dalmia: The US economy is the core to the world economy and that core is held by the US Treasury. Given the kind of political noises we have got from Washington of late, do you think the US Treasury will lose the status of being called as safe haven?

Adrian Mowat: No, I do not think so. We had the possible threat of a technical default in the US. Although that was still many weeks away and there is much the Treasury could have done to divert cash to pay coupons and bonds. When bonds mature, you could reissue because you would not be increasing the debt limits. I do not see any change in the use of US Treasuries for collateral for parking money for foreign exchange reserves.

Although there is a massive misunderstanding about what central banks do with foreign exchange reserves, they tend to be at the shorter end of the curve rather than the longer end of the curve and then if we are thinking about bonds as an investment, it is very important to remember that tapering has been postponed or we call it the tapering timeout.

Janet Yellen will be at some point reducing purchases of US Treasuries and mortgage backed securities. Mutual interest rates in the US of 4% of the short end, 5% to 6% of the long end, we are long way from those numbers at the moment, but investors need to know that is the new scenery. It is a bond bear market. These remain the reserve currency, Treasuries remain the safe assets in terms of collateral values, but I do not think being in bonds is a very smart move over the next couple of years

Nikunj Dalmia: In last two months, EMs have been all over the place. In the month of August, we saw a virtual bloodbath, more like a capitulation followed by strong recovery and now we are staring at a little bit of euphoria. What is going on?