Fed tapering unlikely; underweight on India: Macquarie

Viktor Shvets, Head-Asian Strategy, Macquarie Securities thinks it is impossible for Federal Reserve to do any tapering for a long time be it in December, March or even June. Federal Reserve may not buy treasuries but they will have to do something else because the liquidity just cannot leave market, he adds.

"The moment Fed says they are going to withdraw, we will see correction. As the correction comes-in, Fed will be back with liquidity in one form or another," says Shvets. The Federal Reserve yesterday sounded less optimistic on growth and said it will continue with its USD 85 billion bond purchases. Macquarie prefers to invest in countries like Thailand and Philippines than India and Indonesia, which are structurally impaired according to Shvets. He prefers to buy countries when the volatility is very high rather than when it is low. In India and Indonesia right now the volatilities in bond and currency market are extremely low, he adds. Below is the verbatim transcript of his interview on CNBC-TV18 Q: You may have read very closely the Fed statement. Is it looking a wee bit less dovish as some people have said? A: I do no think so. As we discussed on the prior occasions, I think the tapering is not possible at all whether it’s December whether it’s March or whether it’s June and what I mean by tapering essentially is withdrawal of liquidity. In other words Federal Reserves might not be buying treasuries but they will have to do something else. The liquidity cannot leave the market because as soon as it does, the market will crash - not just the equity market but more importantly the underlying economy. In the last three months US was within 50bps of higher mortgage rates before US would have gone into recession. There is no way that the liquidity can be withdrawn. The way I read the statement, they again addicted to fairly meaningless leading indicators, which do not lead you anywhere, do not tell anything. So, they is still very much data driven. The moment Fed says they going to withdraw, we will see correction. As the correction comes in they will be back with liquidity in one form or another. So I do not view it as hawkish at all. Q: It is good to hear that you do not view it as hawkish because that is great for emerging markets like India but you have been underweight on a market like India along with others like Indonesia. For the next six-eight months how do you think the Indian markets will move because despite the macro data not being good, the market has climbed this wall of worry and now is sitting at historic highs? A: That is what happens - the money as it is pumped has to go somewhere and it tends to go into various financial instruments and speculation rather than investment. The way we try to play, what we call capital challenged countries, which in Asia Pacific is basically Association of South East Asian Nations (ASEAN) as well as India is by investing in Thailand and Philippines instead of investing in India and Indonesia. The reason for that is very simple that both India and Indonesia in my view are much more structurally impaired than countries like Thailand. If you were to argue that volatilities will come back in the next six months then you can guarantee that they will come back because right now volatilities in bond and currency market are extremely low. When volatilities will come back, the pressure will return very quickly back to India and Indonesia. So, I prefer to buy those countries when the volatility is very high rather than to buy them when volatility is very low, which what is happening right now. Stay tuned for more