A likely interest rate hike in the US, the first in nearly a decade, will be withstood well by equity markets in India, says Xavier Denis, Economist-Strategist at Société Générale Private Banking.
In an interview with CNBC-TV18, Denis said a hike by the Fed, which starts its two-day rate-setting meeting today, will send a strong statement about the strength of the US economy, though he added that he would be wary of one market in the wake of a hike: the US high yield.
"You have weakness in the commodity markets, especially oil, which could have a domino effect on energy companies [and their debt standing]," he said.
Below is the verbatim transcript of Xavier Denis' interview with Latha Venkatesh & Sonia Shenoy.
Latha: What do you see the market doing after the Fed that is on the morning of December 17? Is this hike factored in entirely or will there be major ripples?
A: I think it has been priced in but we always know when the decision is made. It is a different story, so I would say that there are two things we can expect. The first one is some kind of market relief because what the Fed is going to work on the rate, it will be seen as a positive message about the strength of the US economy but on the negative side, what is happening right now is still a sharp drop regarding commodity prices especially oil prices and we know there is some kind of domino effect kicking in at the moment from energy prices to US high yield energy sector on to commodity related companies in the emerging markets. So this negative factor will continue probably to drag down the market sentiment in the Fed decision.
Sonia: You did mention that there is some market relief that you are expecting post the Fed rate hike but what about 2016. Do you think risky assets like equities will be once again a favoured asset class in 2016?
A: Yes, I would say so. I think that when you look at relative valuation, I think that lots of equity markets are relatively inexpensive or not too richly valued. This is clearly the case for emerging market, maybe not in the very short run but across 2016 probably investors will start building up position on emerging markets and also when you look at euro zone and Japan; the valuation remains quite reasonable. So it will be a year of decoupling and divergence but equities are better positioned than most fixed income market to boost decent returns.
Latha: As an India investor, what should we worry about? Will India wobble?
A: India is one of our favourite markets across the emerging complex. We keep a positive stance about Indian market at this stage and India is very much positioned and equipped to withstand the Fed hike, we expect across 2016.
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