Fed hike imminent but eyes on commentary: JP Morgan AMC

Ben Luk, Global Market Strategist, JPMorgan Asset Management clearly believes that the US Federal Reserve will hike rates next week on back of strong payroll numbers and wage rates adding that it will be a mistake if Fed decides not to hike.Until the rate hikes next week, global markets are likely to remain quiet and consolidate, says Luk in an interview to CNBC-TV18.However, the focus, he says will be on how Fed plans its strategy to raise rates through 2016. Meanwhile, there is a consensus belief that Fed will hike gradually and post the first hike markets will rally, which he agrees will happen because volatility is basically related to uncertainty.He likes India relative to other emerging markets and says that the sell off seen through the year was because the expected Modi reforms did not take place. However, he expects growth trend in India to continue improving going forward and Fed rate hikes to in fact benefit India.Below is the verbatim transcript of Ben Luk’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: It has not been a great start to the festive season; December has seen the S&P and the Dow move into negative territory for the year. Do you expect any rally towards the end of this year or do you think that now as we get into the Fed rate hike there could be perhaps a bit more of a sell-off? A: If you look back, next week will be the most important week for this year as the Fed is looking ready to normalise their policy. I think right now what investors are looking for us how the Fed will actually communicate the strategy. We do expect the Fed to raise rates next week but what is more important is the rate hike and the overall the rate path going into to 2016. We are expecting a gradual rate path that is actually going to lower the volatility of risk assets is really the most important. I think right from today onwards, the next week we are going to see relatively quiet market and consolidations continue as long as the Fed actually communicates with a very clear strategy that yes we are going to put rates higher next week but the overall rate path will be more gradual going into 2016. Latha: That seems to be the majority or almost near consensus view of the market that the Fed will hike rates but probably even the dot chart will indicate that it is going to be a more benign set of rate hikes in 2016 than the Fed has hitherto indicated and the market is prepared for but that is fast getting to be a near consensus view and that view also expects a bit of a rise in the markets, a rally in the markets after the Fed meeting. You think there is a chance of disappointment?A: I think the Fed has successfully communicated the strategy. Looking back at the Fed fund futures last month comparing to now, close to 80 percent of the markets expect this rate hike. It is very important that the Fed should raise rates next week. The most important thing about risk assets is that volatility is related uncertainty. If we actually have this uncertainty fade out, I do expect the markets will actually rally after this decision to come. Why do we expect this rate hike to be relatively more gradual is that we are seeing low productivity gains in the US. We are actually seeing the fact that the US dollar has actually depreciated a bit, I mean going back from the 100 US dollar index now to 97 US dollar that actually released some of the pressures that we are seeing from the FOMC members. So, overall, as long as the Fed sticks with their communication strategy, this is actually going to be the market based scenario.Latha: All of us are expecting a Santa Claus rally post December 16. Since there is so much unanimity about it, is there a chance it won’t happen?   A: I think the Fed has made some mistakes overall. If you look at the taper tantrum issue that we had seen in 2013 where they had announced some tapering in the quantitative easing (QE) which caused such a shock to the market, the Fed has really tried their best over the last couple of months and we have seen strong payroll numbers coming in, wage growth coming in, all of those numbers indicate to us that there is no reason why the Fed should not raise rates next week. The US economy continues to grow and we expect it to grow at 2.5 percent in 2016. There should not be a big reason why they should not do it and I think it is a mistake for them not to do it next week.Sonia: What is your view on the Indian markets, it has fallen out of favour in 2015 but do you think it will return on the foreign institutional investors (FIIs) book in 2016?A: Yes I think if you look back at the Indian market, definitely we have seen a strong sell-off throughout the year. A lot of the administration and reforms that we have expected from Prime Minister Modi has not really come in yet. However, if you look at the emerging markets relative to India, we still believe India has great value. Yes, India is expensive in terms of valuations on price to book (PB) and price to earnings (PE) basis but the overall earnings growth trend continues to slowly improve after last quarter's weak earnings numbers.More importantly, what we do expect that when the Fed starts to raise rates, India is much better positioned compared to before; we have much strong FX reserves now, current account deficit has narrowed. Overall as long as the global economy continues to improve and India will benefit from that so we actually like India as well going into 2016.