Gold Silver Reports — Fed to Continue Hiking Rates Gradually for 12-18 Months — Indian market valuations are not cheap but given the attrac tive prospects of emerging markets, it is unlikely to stop investors from coming into the country, said Tai Hui, chief Asia market strategist at JP Morgan. In an interview to Sanam Mirchandani, Hong Kong-based Hui said the Fed is likely to hike rates in December but that will be contingent upon jobs data in the coming months being stable.Edited excerpts:
What is your take on Fed rate hike?
We do expect the Fed to raise policy rate again in December but this is contingent upon job data in the coming months being stable. More importantly, we think the Fed will continue to hike on a very gradual basis over the next 12-18 months due to low inflation pressure.
Is the phase of easy monetary policies and negative interest rates by central banks ending?
For the ECB (European Central Bank) and BoJ (Bank of Japan), there is growing opposition on additional easing but we believe their stance of loose monetary policy should not change substantially since they are still a long way away from their inflation targets. But more QE (quantitative easing) do have negative side effects. It is no longer a cost free strategy. Central banks need to think a lot harder in terms of what they are going to do to achieve inflation targets.
What does this mean for EMs?
When we say that easy monetary policy is coming to a limit, it just means that central banks cannot print more money than what they currently are. It does not mean they will take their money back. In emerging markets (EMs), it is not only the monetary policy that has been facilitating the rebound that we have seen so far this year but there are certain things that are changing within EMs that are attracting investors. Further upside to dollar is likely to be limited and therefore, this is the time to re-engage with EMs. Oil prices have established a floor at $30-35 per barrel and a ceiling around $55. This is arguably the goldilocks range for EMs. Thirdly, there are still a lot of concerns about the Chinese economy and its corporate debt situation but the economy is relatively stable.These factors are luring back investors into EMs.
How is India positioned particularly on valuation front?
Indian equity market is not particularly cheaply valued but I would not be too concerned. If international investors feel that EMs are looking more positive and money is coming in, there will always be a portion that will be allocated to India. In the next 6-12 months, EMs are looking more attractive which means that despite valuations being slightly above average, we don’t worry that it will stop investors from coming into EMs or India. India has a number of attractions in addition to GST (goods and services tax) and monsoons. The reform process has been lengthy but we are starting to reap positive results. The way the RBI (Governor) transition has been handled is being appreciated by investors. Monsoon is good which means inflation is manageable, allowing for an accommodative policy stance.The global trade cycle is not well, it has been barely growing. Hence, countries with large domestic demand or consumer base are likely to do better, and that includes India.
What are your expectations from the earnings?
Earnings are starting to stabilise after several years of disappointment.Most of the expectation on earnings is not particularly demanding, the bar is set relatively low which means the ease of passing those expectations is a lot higher. We are seeing that across Asia where earnings momentum has become less pessimistic. Asian and Indian companies’ earnings are looking much more constructive relative to expectations. Growth rate may not be as great as the boom time but at least compared to very low expectations, the ability to beat or match it has become much better.
What investment themes are you looking at?
In Asia, the industrial sector has been underperforming but we are also seeing the sector starting to pick up in terms of growth momentum and valuation. Secondly, we like the consumption theme. While global trade may not be doing so well we expect consumption to be robust in India, South East Asia and China.
What will be the impact of US elections on markets?
The presidential elections should have only a short-term market impact. A Trump victory could prompt greater market volatility than a Clinton victory since his policy stance is more of a radical departure from the status quo. — Neal Bhai Reports