Expect Fed to start tapering QE by November: Macquarie Sec

Richard Gibbs, Macquarie Securities told CNBC-TV18 that he is expecting the Fed to start tapering quantitative easing (QE) by November and it would start to accelerate around the March quarter of 2014.

Minutes from the Federal Reserve's June policy meeting was released on Wednesday. In the meeting Bernanke said that highly accommodative monetary policy is needed for the foreseeable future and that the US unemployment rate at 7.6 percent may be overstating the job market's health. Talking about the Indian equities and currency, Gibbs said that there will be potential capital growth in emerging market and in the Indian markets, particularly in those stocks and sectors that have been unduly sold down. Below is the verbatim transcript of his interview to CNBC-TV18 Q: This reaction of the markets, do you think this rally can go on for a goodish bit? Has the situation on the ground changed considerably in terms of liquidity expectations? A: There has been some change at the margin. I don’t know if that has changed radically or fundamentally. At the end of the day the US is still going to be moving to some form of tapering in terms of its quantitative easing operations. It is unlikely to be a substantial and as early as some of the market heads thought. I think that’s what leads to the overreaction. It is also not going to be governed by the calendar. As Bill Dudley was saying last week and Ben Bernanke going to reinforcing that in his comments, but also reinforcing the fact that the decision also is not going to be strictly numerically dictated to by the unemployment rate. Q: What’s the observation in the currency space? We have seen emerging market currencies rally quite a bit. Is it just short covering or are you seeing instances of perhaps investors going long in the emerging market risk currencies? A: There is some currency value there, for example if you look at the rupee, it was the worst performing currency in June. Of course that’s really an oversold position on that. So, I think we have seen the capitulation in a lot of emerging markets across asset markets and in the exchange rate markets and there is a consequence of that. We are staying to see a bit of more reasoned approach. Investors coming back in and looking for some value there and certainly they can pick up some capital value given the capital slowdown we have seen on all those exchange rates. Q: Now, when are you expecting the quantitative easing to start to taper? How much have the markets factored that in? A: We still expect that by November, we will be seeing the early stages of that tapering process being commenced by the Federal Reserve. Fed has been quite active on the ground in New York as far as conditioning the bond market, bond traders in particular. People should be very clear on this. As Ben Bernanke said, it doesn’t mean that we are going to get an explicit rise in interest rates. What it means is the asset purchase operation will begin to be around back in very orderly fashion. So, we would expect that to commence in November and move through the outturn of the year into 2014. I guess probably start to really accelerate as we move through that first quarter or March quarter of 2014. Q: What we have seen in the past several months have been a long US equities, short US bonds and short emerging market equities. Does that broad trend change now or is it just put in cold storage for the moment? How much more upside do you see for Indian equities and currency? A: I think it becomes much more opportunistic now. We have seen that broad dichotomy existing, but I think we have actually as a consequence of that seen some oversold positions emerge. We have seen companies where really there hasn’t been due regard given to their revenue potential and the top known revenue growth in their domestic markets in particular. So, I think we would start to see those things sort out as value stocks if you like and value sectors around the world. That really is going to reflect this change in mindset by investors which has been actually stimulated as a consequence of the tapering operations of the US being considered and that is away from yield and to capital growth driven investment. There will be potential capital growth in emerging market and in the Indian markets, particularly in those stocks and sectors that have been unduly sold down. Q: Experts indicated that they expected the QE to start tapering by September. After yesterday’s comments do you think now the majority or the bias is now shifted from September perhaps to end of the year, November as you expect? Is that priced in into the market? What is it currently suggesting - September, November, December or perhaps even next year? A: I think September is far too precipitous. I don’t think that was supported by last Friday as non-farm payroll either. I don’t see how you could have seen the movement in the unemployment rate and the total jobs growth even at 195,000 being consistent with an earlier start to quantitative tapering in the United States. So, I think it has shifted the more excitable elements back out in terms of their time horizon. I think that’s a wise thing. Of course, given Bernanke be well aware of that and his comments would be designed to actually try and maintain control of the agenda if you like in terms of the commencement of the tapering process. Q: What’s your expectation of foreign institutional investors (FII) in the Indian debt market? Will the outflow stop or perhaps can we see some inflows as a relief measure? A: I don’t see inflows as a relief measure. I think we have got to see some rebounding overall of global portfolio. I think they have been excessively waited towards on the capital growth side and equities. Outflow out of fixed income has been a little excessive. So, to the extent which we have seen yields normalising if you like and bond prices normalising particularly in emerging markets like India then I think that’s a better value investment prospect in for those fixed income funds to be getting back into.