Rates hike is imminent in US, feels Hong-kong based Adam Matthews managing director & head of Asia CPM team, JP Morgan Asset Management. In an interview with Muthukumar K and Chirag Madia, he says a weaker dollar, could actually benefit Asian market as it could keep Chinese exports competitive (the Chinese yuan is pegged to the dollar). This in his belief is more important than Asian exports becoming uncompetitive (from a weaker dollar) as the Chinese economy is now the the mover and shaker of world economic growth.

In the current calendar year, fund flow allocation to emerging markets have been lesser as against the developed market?

If we go back to the start of the year, global investors then switched money from emerging to developed markets. We didn?t do so then as we believed the real problems of developed economies?be it of US household or European sovereign debt?were yet to be sorted out. It seems that everybody got enthusiastic about the recovery in US economy in a short period of time. There were certain factors to be bullish about though?say US exporters doing well given the weak US dollar. Beyond that we couldn?t justify why people were so excited, given that none of the big structural problem were solved in Europe and US.

While we saw initial outflows in the first quarter of this year into emerging markets, it was shortlived and the money hasn?t come back into the Asian markets yet. Analysis of our own funds in India, China and Asean countries indicated some money creeping back into the Asian markets in early May, but then it petered out.

For global investors to come back to India and other Southeast Asian nations, inflation needs to be brought under control. Whenever I speak to Middle East sovereign wealth funds, European pension funds or Japanese pension funds, they state two major concerns for investments into Asia?inflation and hard landing of the Chinese economy.

It seems that US central bank might increase the interest rates in the second half of the year? What will be the implications of it for the Asian equity markets?

There might be some rate hike in US; it can?t continue to have lower interest rates for many years as Japan did. If they hike rates to some extent, it will cause the dollar to appreciate. If that happens that will be good for Asia, everything else remaining constant. We can also make a argument that, China?s exporters do well when the dollar is weak (as it is pegged to the dollar), while it is not the same case with other Asian countries. So I think in an environment where dollar remains weak, its good for China and I am of the view that what is good for China is by and large good for Asia.

But by and large there are two choices ?have a weak dollar?and a stronger Chinese economy which in turn could keep commodity prices higher or a strong dollar? or weaker Chinese economy which in turn keeps commodity prices lower. I would prefer the former as the Chinese economy is largely leading the incremental growth of world GDP.

On the overall basis, what is your view on the Asian equities?

I think our overall view is positive on Asian equities. What makes Asia stand out currently is that during Asian crisis (1997-98), countries like Malaysia, Indonesia and Thailand went bust. And they dealt with huge levels of debt in the system?be it corporate or government US dollar-denominated debt. For example in Korea the debt to GDP ratio doubled post Asian crisis with depreciation of local currency and most debt was US dollar-denominated. Domestic economy crumbled then, yet bigger companies didn?t go burst.

I think the Asian crisis is the best thing that has happened to Asia as since then companies and governments have spent years deleveraging and managed to keep deficits under control even in the worst of times.

But inflation still remains a concern for Indian economy.

It is less of a concern as long as growth is there. I think due to the higher inflation some investors are sitting on the fence. Currently in India everybody is looking at the political situation, some are looking at debt levels, but most importantly they are watching inflation. If CPI (consumer price inflation) comes down to 5-7%, people will be bullish on India again. Every investor who is sceptical about Asia is convinced that Asia is entering a prolong period of inflation.

But has inflation started to affect domestic demand in Asia in a major way?

Its probably started to happen. India though finances a lot of buying through bank loans while in China buyers buy mostly through cash or atleast 50% down payment. I wouldn?t say that there have been change in consumption demand yet.

Can you shed some light on which regions your are overweight or underweight on?

We are still overweight on China as it is still cheap at these levels and we believe in China?s ability to engineer a soft landing, which is most important. The Shanghai Composite index is down in the past few months which indicates that retail domestic investors in mainland China are still bearish.

A Shanghai-based investor usually invests either in equity markets or real estate, based on its lucrativeness. I think in the next 3-12 months property prices will soften in China, which will be good, as many people are waiting to buy a house in China that they cant afford to buy now.

As regards Chinese equities, ?H? shares comprising Chinese companies listed in Hong Kong are a better gauge of foreign sentiment on China. I think lot of risk has been priced in China, but foreign investors are yet not ready to buy Chinese stocks, remaining concerned about its hard landing and its inflation.

I believe as long as domestic consumption is strong, China alone can achieve 7-8% GDP growth, so we are still positive on China. If China grows at 12%, then it means global growth is huge and if China is growing at around 9%, that means global growth is flattish.

We were overweight on Thailand, but due to forthcoming election (when there is usual market volatility) we have cut exposure. We made a lot of money investing in Thailand in the last two years. Also, we want to get back to investing in Indonesia.