The US Senate may vote on debt ceiling by the week-end or next week, believes Giles Keating, head-research for private banking and wealth management at Credit Suisse, who expects things to get worse before they get better.
"If we get a resolution of US government problem then the markets will again focus on tapering and when the Fed is going to start draining the liquidity and of course that can be bad news for emerging markets (EMs)," he told CNBC-TV18 in an interview.
Currently, Credit Suisse Global Investment is underweight equities mainly on the back of political uncertainty in Washington, the resultant pause in growth momentum and also the lingering tapering issue.
"If all those worries get resolved, then we would move to a more positive stance and we will have done that by end of this year and as we go into 2014, we would hope to be overweight in stock markets on the back of a gentle acceleration in growth around the world and gradual rise in corporate earnings and we would balance that with a more cautious position on fixed income," Keating says.
He says 2014 will be a year for stock markets with Europe beginning to come from behind and EMs having some brief period of catch-up but in a pretty selective way as investors really look conditions genuinely improving.
Below is an edited transcript of the interview on CNBC-TV18
Q: There seems to be some kind of overnight development of reconciliation but do you think that this shutdown and debt ceiling debate could get resolved only after a gut trenching fall in asset prices?
A: We are watching the US government situation very closely. There are one-two good signs with two sides indicating possibility of a vote in the Senate end of this week and in the House next week. This is a high stake game and the two sides are far apart. The risk here is that these debates could go on for a long time. Certainly, past the deadline, which are mentioned taking as well into second half of October, this will lead to financial market disruption. We have already seen short-term interest rates rise sharply. Lot of people does not want to hold treasury bills. It will get worse before it gets better.
Q: After seeing a round in July and August, in the month of September we have seen some decent flows into the emerging market. Do you see this continuing until the end of the year into countries like India?
A: I do not think it can be relied up. If we get a resolution of US government problem then the markets will again focus on tapering and when the Fed is going to start draining the liquidity and of course that can be bad news for emerging markets (EMs). So I don’t think there is any kind of straight line for these flows coming back into Ems’ stock markets. There will be one or two good periods ahead but investors are getting more and more selective. They want to see emerging economies run sensibly with good policies and I fear they will be very unforgiving if they don’t see those improvements.
Q: How do you chart US growth from hereon and according to you when and how will the tapering theme play out?
A: The US economy even before we got into this problem in Washington was showing a slight loss of momentum into three of the economic indicators. That is likely to continue up to the end of this year even if we get a resolution to the problems in Washington. Next year, we will see a reacceleration in US, not least because of cash on corporate balance sheets and interest rates are extremely low. Against that background, the Fed will go back to discussing tapering and whether that happens early next year or later next year, it is definitely on the way.
Q: Focusing back on India; there seems to be some sort of momentum that we have seen over there in the last few days. So, after the rough treatment that we got in July and August, do you see elements of a turnaround in the Indian economy or economic policy and equities?
A: I think investors, when they look from abroad into India are going to want to see clear signs that on he one hand monetary and macro policy are stable and the moves central bank has been making go in the right direction although more is needed. They want to see the current account deficit under control and importantly they want to see real progress on structural reform. Whether they are going to perceive all of that is a very big question mark. If they do not see those things then India perhaps can benefit in a limited way from those moments where investors are putting money generally into emerging market but it is likely to be a limited way as investors look to other countries where they see policies and outcomes going more clearly with a green light.
Q: What will be your three best asset classes from now to the remaining part of 2013, assuming the debt ceiling will be resolved and what will be your best assets in 2014?
A: In Credit Suisse Global Investment Committee, we are underweight equities. We are concerned about political uncertainty in Washington, pause in growth momentum in the US, we also concerned that the tapering issue is not gone away and is coming back. For all those reasons we are underweight equities. We have neutral position on fixed income although even there we would on balance be reducing some of the riskier parts of our fixed income exposure. So that is another cautious position for Q4.
If all those worries get resolved, then we would move to a more positive stance and we will have done that by end of this year and as we go into 2014, we would hope to be overweight in stock markets on the back of a gentle acceleration in growth around the world and gradual rise in corporate earnings and we would balance that with a more cautious position on fixed income.
So, 2014 will be a year for stock markets with Europe beginning to come from behind and EMs having some brief period of catch-up but in a pretty selective way as investors really look conditions genuinely improving.