Major mkts seen falling on debt ceiling, Fed taper: Experts

Though the US Federal Reserve has delayed the bond buying program taper, it is likely to have a significant negative effect on global markets, opines Ramin Nakisa of UBS Investment Bank.

Also read: See volatility; compromise on debt ceiling: Roubini Global
Speaking to CNBC-TV18 on the implications of the US Fed taper and the result on the debt ceiling debate, Nakisa says the tapering of the Fed’s USD 85 billion worth bond-buying program will give a psychological shock to the international markets.
“We expect equity to recover quickly while we do not think fixed income will recover. So, our default allocation for this year is to be heavily overweight equity and underweight government bonds,” he adds.
The US debt ceiling debate too will make the markets correct significantly, says Jeff Chowdhry, F&C Investments. Chowdhry is of the view that the markets are no pricing in enough risk as far as the debt ceiling impasse is concerned,
“In the short-term it is going to have a fairly negative effect. There is clearly a stand-off between both sides. So certainly in short-term I think it is definitely a risk-off mode,” adds Chowdhry. Below is the edited transcript of Chodhry and Nakisa’s interview to CNBC-TV18. Q: The Fed has turned out to be a paper taper. It has certainly given time for a country like us to act and get our fiscal and monetary houses in order. Do you see New Delhi doing that and are we going to be in for a bigger shock when the ultimate taper happens? Nakisa: I think the Fed is clearly going to try and engineer a smooth taper. The USD 10 billion reduction would be marginal. I still would not underestimate the shocks that this will have on markets.
We have seen an incredibly long, incredibly accommodative and unconventional set of policies for a very long time. So, as we remove that, the psychological shock would be significant. I expect yields to get higher again as we saw in June.
I think that will have a negative effect on fixed income, but there maybe a short-term tumble in risk assets like equity. We expect equity to recover quickly while we do not think fixed income will recover. So, our default allocation for this year is to be heavily overweight equity and underweight government bonds. Q: We have given up most of the early September gains in US as well as in Europe, some of this has been attributed to the governments standoff over that debt ceiling that we are seeing in the US. How much do you expect will that be the cause of volatility both in the US and Europe? Nakisa: I think this time the debt ceiling debate may be very rancorous because it seems Obama is completely unwilling to negotiate in anyway. His point is that they are just agreeing to spend which they have already agreed. So, there isn’t really any debate from his point of view.
It is likely to lead to clashes in Congress and we may see like we saw in August 2011. So obviously we are slightly cautious about that and we have gone overweight volatility as a result because we do want to slightly hedge our overweight equity positions.
But we are still seeing a very strong recovery particularly in Europe where we are seeing a very good acceleration of our forecast to GDP. Our preference for the moment is for the US, UK and Europe which is our biggest overweights and we are still neutral yen. Q: How long do you see this risk-off mood lasting and what impact do you think that government's stand-off is going to have on global markets? Nakisa: What we are in now is a kind of a lull before we see the Fed taper. We are just waiting for that to happen. Once that is out of the way, markets can re-evaluate the position and that is when we will see a significant rotation into equity. Q: We have lost most of the September early gains in the US and in Europe post that Fed non-action on Thursday. What do you make of the impact of the government debt ceiling issue across global markets? Chowdhry: In the short-term it is going to have a fairly negative effect. There is clearly a stand-off between both sides. Markets are not pricing in enough risk as far as this particular issue is concerned. So certainly in short-term I think it is definitely a risk-off mode.