Fed to maintain neutral tone in FOMC meet: Hans Goetti

With the all important FOMC meeting around the corner, Hans Goetti of Finaport believes that the Federal Reserve will soften its tone and may not come up with another liquidity program.

According to Goetti, based on fundamentals, the US market would trade lower. But there is hope that Fed will come up with something that keeps it up there. “We think for the next few months, the fundamentals will not get any better. Corporate earnings should be flat at best for the year and economic activity probably will deteriorate further into the summer,” he stated. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: The outlook on India’s rating has been made negative from neutral by S&P. Will they seriously impact flows? How important are changes in outlooks?
A: Not very important. Very often, rating agencies are very reactive, so I think whatever has come up is hugely built into expectation already. So I wouldn’t read too much into this. Q: What are your expectations from the all important FOMC rate decision? Would it spur the markets?
A: I think a lot of people have this faint hope that the Fed will soften the language a little bit. We have seen the US economy starting to slowdown during March. Economic data has clearly started to soften a little bit. But we think it’s not enough yet to prompt the Fed to come up with another liquidity program. We have to bear in mind that the operation twist is still in place until the end of June.
It probably would take further deterioration in the economic data for them to soften, to maybe to ease a little bit more. We know short term rates will stay low for the next several years. But the market will look for any hints of QE. We think it will happen, but not soon, probably in a few months from now. Q: So is it possible that the FOMC statement maintain this neutral tone that you are talking about and doesn’t give hints of quantitative easing; we could see some kind of risk taken off across asset markets?
A: We are in a correction mode anyway right now. The market is unsure; for the S&P 500, the big support level will be at 1340. We have not reached that, we have started to bounce up again. So we are in this trading range where the market doesn’t really know which way it’s going.
Based on fundamentals, we think the market would actually trade lower. But there is hope that Fed will come up with something that keeps it up there. We think for the next few months, the fundamentals will not get any better. Corporate earnings should be flat at best for the year and economic activity probably will deteriorate further into the summer. Q: Do you expect commentary with respect to Spain or Dutch where a lot of concerns are now being raised to increase and can that result in a risk off trade for the global markets?
A: We are fluctuating between risk-on and risk-off constantly. We think this will continue for the next few months. There will probably be no decisive move in any direction. So probably what we could look at are certain investment themes, for instance, the income theme for us is still very valid.
You have demographics which suggest that a lot of people will start to retire in developed economies. There will be demand for income, which means high dividend yield stocks, high yield bonds and so on. For us, that is an investment theme that we are looking at. So instead of looking at markets, we are actually looking at bigger themes played over the next few years. Q: We did see some risk on in the first 2-2.5 months of 2012. Are there any factors in place to see that risk on coming again? When do you see it come on at all?
A: The reason for the rally that we have had since October was again liquidity driven; everything is driven by Central Banks. We had the LTRO in Europe. The ECB injected about 1 trillion euros into the European banking system, and that of course, triggered that rally. Now this monetary stimulus seems to be waning again. This is what the markets are a little bit nervous about.
Everybody is looking at Central Banks to come to the rescue and that’s why this FOMC meeting is somewhat important. If the reviews are changing the language again, we don’t think it will happen this time but later in the year. We are pretty convinced that the QE or one form of QE will be in place. Most likely, we are going to see the risk on trade again in the second half of the year like we had in 2010-2011, the parallels are actually quite striking. Q: You spoke about global markets being extremely range bound. Which asset class would you invest in to make money?
A: Ancient bonds, in our opinion, are still in a bull market. The treasury bond market in the US has been declared dead last month when treasury bond yield went to 2.40% now we are below 2% again and I think it will go even lower.
Bearish sentiment is absolutely overwhelming. We have to remind ourselves of one thing, we are in a deleveraging cycle, debt levels are too high everywhere and debt has to be liquidated at least or brought down to levels which are sustainable. This is a process that will go on for the next few years.
As long as economic activity is concerned, anything will be affected by this deleveraging cycle. Therefore we think deleveraging, or in Europe austerity has very strong deflationary effect on economies. That is why we think bonds will still do well, high yield bonds among them.
In the equity space, we like high dividend yield stocks probably like everybody else. But we think the theme is still valid, and then of course, with Central Banks in the money printing mode, gold and gold mining stocks are still good.