QE on till US jobless rate falls; Re to turn firmer: HSBC

Andre De Silva of HSBC explains on CNBC-TV18 that the Fed will continue with quantitative easing till the rate of unemployment falls, He expects the rupee to turn firmer with continued government initiatives to reduce the fuel subsidy, but is concerned that truant global oil prices could derail the process of strengthening in the rupee.

Below is an edited transcript of the analysis on CNBC-TV18 Q: The gains in China were fairly strong, especially in Shanghai and the Nikkei. Will the risk-on continue with strong economic data in China and certainly continued good data in the US as well?
A: The growth data is fairly robust at least in comparison to the previous quarters, at 7.9 percent. So, the definitive signal that has been sent out is that a hard landing has been averted and the global economy is on a firmer footing with growth reviving in China, Japan returning to the fold with its liquidity policy, the start of quantitative easing (QE) by the Federal Reserve, the European Central Bank (ECB) has reduced rates and the Bank of Japan (BoJ) is all set to deliver including addressing the weakness in the currency. Q: What about the US? Do you think that it is likely that the Fed perhaps could pull out before end of 2013? What are you factoring-in, in terms of risk from Europe? Will there be an increase in risk in the second quarter or any tail risk from Europe at the moment?
A: Starting with the US, I understand there are concerns in the Federal Open Market Committee (FOMC) which held the views that the QE3 which was open-ended might have to stop some time this year. I think that is highly unlikely while the rate of unemployment is at 7.9 percent. The rate of unemployment needs to be heading towards 7 percent before there is any consideration of removing the open-ended QE3. There are still a lot of structural problems.
Regarding the euro zone, ECB President Draghi in a policy meeting held last week indicated that the risks have been removed. So, I think with that framework in place, it is a positive and does not need to be triggered. Q: Do you think there will be incremental flows into developed market equities or emerging market funds?
A: It is difficult to answer. But it is clear that incremental flows are probably in a period of a great rotation. In 2008 and consequent years, it was all about bonds and developed bonds, particularly US treasury bonds. Now flows are looking at other asset classes. With valuations having become very tight and the bond markets offering low yield levels, the flows are going into equity markets. So yes, equities are being favoured in Asia. Emerging markets are a focal point because is the discrepancy in growth is building up.
In India the growth level of 5.3 percent is probably close to bottoming out. So it is expectations, not necessarily about the absolute levels, that should reinforce appetite for EM assets generally. Q: What is your view on India at this point?
A: I think India has come back on the radar since September with its refocus on policy announcements and further initiatives in terms of fuel prices increases or reduction of subsidies. But the initiatives need to be in the context of private capital also in terms of the government bond market where yields are below 8 percent for the ten-year segment.
It is still far higher than most other markets. So as long as this additional incremental ability to access the market remains, there will be demand indeed. We are seeing pent-up enquiry investing into India both at the government-bond level and at the corporate market level. Q: Would a foreign investor be interested in Indian corporate bonds as well as the infrastructure sector?
A: This is similar to other developments in the Asian markets over the past five-to-six years or longer since the Asian crisis in the mid-1990s. The first protocol is governments for investors who have a much more affiliation in terms of the macro environment.
The proportion of all Asian debt is around 80-percent government to 20-percent credit. In the US, the ratio is 50-50. Foreign investors have the appetite but are much more comfortable entering the government-level first. Once they are familiar with that, there is an increase in appetite. I understand various financial institutions in India are tapping into the credit market in Singapore for example, and meeting this global demand. Q: How would you look at the rupee’s almost celebratory performance? Given the high current account deficit (CAD), what's the trajectory for the rupee?
A: There is now a leap of faith in terms of appreciation in Asian currency with the return of the appetite for EM debt and liquidity. I am concerned about oil prices. As long as oil prices behave currency appreciation is likely to continue. Q: What do you think about India’s sovereign rating?
A: I think the markets welcome an upgrade in rating. The rating agencies are also looking to making further inroads in terms of reforms. In terms of rating versus valuations, India’s bond market stands out as being pretty cheap in relation to the investment-grade status.