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Last Updated : Jun 08, 2015 01:15 PM IST | Source: CNBC-TV18

Dec Fed rate hike likely; Nifty may correct further: HSBC

US job growth accelerated sharply in May and wages picked up. Non-farm payrolls increased by 280,000 last month, the largest gain since December, and above the 225,000 that economists polled.


The acceleration seen in US jobs suggests the Federal Reserve may now hike rates in December instead of September as was the expectation, says Herald Van Der Linde, Head- Equity Strategy for Asia-Pacific, HSBC.

Linde says the strong payrolls data has been disappointing against the backdrop of poor earnings growth and a strong dollar, which will negatively impact exports.


US job growth accelerated sharply in May and wages picked up. Non-farm payrolls increased by 280,000 last month, the largest gain since December, and above the 225,000 that economists polled.


Furthermore, Linde expects the Indian equity market to see more correction. While he expects investment cycle to revive on the back of low interest rates, he believes the pace of recovery in earnings won’t be too impressive.

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“We have already seen some of the earnings coming down but the most important factor is interest rate; we just do not think that interest rates will come down as fast as the market was anticipating,” he adds.

Below is the transcript of Herald Van Der Linde's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.


Latha: How should Indian investors look at the data from the United States? Should it be immediately negative because bond yields went to 2.4 or is it ultimately positive?


A: If you look at the data from the US, we have postponed our rate increase from September to December over the weekend because we think that in general, data that has come through is a little bit disappointed. So, that may be the first rate increase is going to happen much later in the year than what we used to anticipated.


Sonia: Why would the data disappoint you, the jobs data that came through on Friday was pretty strong?


A: The data has been a little bit disappointing against general expectations. I am talking about earnings and other things. So, we think there is a bit of a risk also. There is a stronger dollar impact on the US exports that could drag down growth a little bit. So, I believe that instead of September, the Fed will increase interest rate in December this year.


Latha: How should an investor into emerging markets particularly India, interpret the global data events. Should we expect that because of higher rate on the US 10-year we should see selling?


A: We been underweight India for little bit of a time now, so it is a market we do not like at this point in time and that is not so much related to the US. Although, I would argue that if interest rates stay lower for longer, then on the margin it will be positive for emerging market as well. However, we are a bit more concerned on some of the domestic issues.


Sonia: Since you are underweight on India what is your view on what exactly is happening in India. We have corrected about 11 percent from our peak. Is this still a correction in an ongoing bull market?


A: I do not necessarily think so. I think we are going to see little bit more correction in India and the focus is on the reform side. I do not disagree with the fact that with low interest rates, investment cycle should recover in India, but I think that the pace of recovery in the investment cycle as well as the pace of earnings growth in India would disappoint.


We have already seen some of the earnings coming down but the most important factor is interest rate; we just do not think that interest rates will come down as fast as the market was anticipating.

Latha: So do you see much more downsides?


A: Yes, I believe there is further downside to the Indian market; interest rates are not coming down. The risk is that consumer price index (CPI) inflation is still above the target which the Reserve Bank of India (RBI) wants to move to by the end of next year. That means they have to keep it relatively tight and of course all these risk factor is the possibility of food prices in El Nino coming through and the RBI indicated last week that they want to wait until the end of monsoon before they have a clear view on food inflation before they make any other further adjustments to interest rate. However, we have a similar view that for the moment the interest rates don't provide any support to the Indian equity market and reforms are little bit slow than what initially was anticipated that that there is downside risk, the expectations were high but we are not really meeting them.


Sonia: What is your own view on global equities given that you expect the Fed to raise rates in December up until then do you think liquidity will remain benign and if yes, which markets do you prefer if not India?


A: At the moment, the market is anticipating that its either September or December. I think the market is maybe focusing a little bit more on September data at the moment, but we will get very clear on that on June 18 when they will have their regular meeting.


What is maybe more important is that we see already unfolding some of the positions in the global bond markets taking place and long-term bond yields are moving higher. However, what that mean for emerging markets in general is that that’s probably not too positive. If we see a strong dollar - that might also not be too positive for emerging markets in the very near-term. So all I would say people are cautious on the emerging markets and therefore global investors and investor among EM are likely talking to global investors here in the US and lot of them see good value in emerging markets as against some of the other markets. I would say in general, people are cautious on the US markets, generally bullish on the European markets where good earnings growth coming through and macro data here surprising on the upside, there is obvious event risk taking place in Greece in the very near-term and aside from that people got bullish on Europe and global investors are willing to rotate into emerging markets. What we need to overcome some of the macro issues which is more related to forex risk and the divergence between low interest rates in emerging markets and interest rates particularly in the US.



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First Published on Jun 8, 2015 08:50 am
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