In an interview with CNBC-TV18, Kamakshya Trivedi, Chief EM Macro Strategist, Goldman Sachs, talked about his outlook on markets and whether he thinks they will be able to stomach a Fed rate hike and a rise in bond yields globally.
Below is the verbatim transcript of Kamakshya Trivedi’s interview to Latha Venkatesh on CNBC-TV18.
Q: What are your views on equity valuations in the global markets?
A: I think one of the key underlying drivers of the very high equity valuations are the very low level of bond yields globally. The concern that many people have -- and that has been fed by some of the recent statements coming out of the European Central Bank (ECB) board members or from the Bank of Japan (BoJ) -- is that you may see some withdrawal of the very high levels of stimulus that has been in place from these central banks.
Some of that withdrawal might push bond yields higher and that key support that has been there for equity markets globally but in emerging markets as well, in India as well, that would come off and that would create some pressure for equity.
So, I think that lingering concern has always been there, given how low rates are but that concern I think has become a bit more approximate given the recent actions by the BoJ to steepen the curve and the recent statements that we have heard out of some of the board members of the ECB.
Q: Do you think the markets will be able to stomach a Fed hike without too much of dislocation?
A: I am personally not that worried about the Fed hike itself. I think one Fed hike every 12 months is something I think that markets broadly should be able to digest. I think even emerging markets should be able to digest. The big reason for that I think is that going back to 2013 when we had the taper tantrum and the scar tissue of that is with us for a long time. I think relative to that period, emerging market fundamentals are in a much better place. External balances have corrected substantially, the real rate of interest is generally higher than it was at that point. So I think the fundamentals are in a better place.
So, we have found in our research that shocks to developed market rates, small shocks having less of an impact in emerging markets today than they were at that point in time. I am not that concerned about one Fed hike provided it is coming at a pretty gradual pace, which is what they seem to indicate.
I am more concerned about the back-end of the curve. I am much more concerned about the fact that if you see a very sharp backup in long-term rates, that does tend to affect emerging market currencies, that does tend to affect equity valuations much more squarely. If that happens, you will see more pressure and some degree of volatility that markets will have to digest.
Again, I would go back to what I said earlier, I don’t know that you can have a very big increase in backend rates in some of these core developed markets without tightening financial conditions in them too much. So, I don’t think central bankers want to generate a big tightening in financial conditions.
I think what is happening is there is a greater recognition world over of some of the negative side effects of quantitative easing and I think that is some of this what they want to temper rather than engineer a very sharp steepening that tightens financial conditions and causes dislocations in markets.