FOMC move will be explicable, data dependent: NAB

A: We have got a fairly flat opening start to the continental markets, the London market FTSE Index is falling quite sharply on two specific profit warnings, one from British Gas and another on the M&A sector where a bid for Vodafone has been ruled out for the next six months to quite heavy market capitalisation stocks in the London market. So, Continental Europe is steady. We have IFO Survey in just under an hour from Germany which is expected to calm a few nerves, but there is certainly nothing of any description that resembles a rally anywhere in Europe at the moment.

Sumaira: Ahead of the FOMC meet then, is there any trigger that you would be watching out for out of the commentary there? Would you look for any incremental weakness post that?

A: In terms of the Fed, a further USD 10 billion withdrawal of monetary stimulus has been very well flagged both by FOMC members and some of their favourite media commentators. We often have to look at how they use media these days. They would be keen to signal that there is no predetermined pace for the withdrawal of stimulus. They do not want it to be seen that they are going to withdraw the stimulus irrespective of the economic data, in other words it would still be data dependent and as long as that data continues to peak up then they are right and to be on the course that they have set.

On Thursday this week we will get the US GDP numbers for the fourth quarter. We came off the back of some very strong growth in Q3, 4.1 percent annualised. If we are in the mid to high 3 percent for the fourth quarter that will be very encouraging end to the year. I am sure there was plenty of forward momentum into 2014. So the FOMC meeting, 24 hours ahead of the GDP should be explicable and not ruffle too many feathers.

Anuj: Are the emerging markets overreacting? Last time you said that Indian markets looked a bit overextended and you would recommend profit booking. How would you be placed on India right now?

A: In terms of India you did say that they have been the best performers and it could be vulnerable to a near-term correction, both things still hold. On a relative basis, India has been the best performing of the major EM markets. If you put your money in China at the start of the year, you would have lost 3.9 percent. If you had put it in South Korea, you would have lost 5 percent, but the Indian market, the Sensex is down 1.7 percent, the Nifty is down 2.1 percent. So we have got relative outperformance which is a positive.

In terms of currency, of the 24 emerging market currencies that we monitor, rupee year-to-date is in 10th position and so, it is not bad. It has given up a bit of ground, but is certainly in the top 10. There is no particular pressure apparent on the currency. So, that does suggests that underlying sentiment is not turning negative. In terms of absolute return, are we going to make or lose money today or tomorrow is still probably the case that EM generally is going to come under a bit of pressure, but it could well be that the worst of that selloff in 14 could already be behind us simply because it is now making headlines.

A market that falls without ever creating front page headlines is always a bit of a worry, because it means the worst is yet to come, but when we are already talking about front page headlines and new stories on the top of the hour you mean that we are close to a bit of a turning point.

Sumaira: Given the relative outperformance of the Indian equities as well as the currency, how would you look at both these asset classes in the run up to our general elections which comes up in about 2-3 months?

A: I think that will induce certain investor caution. There are no prizes in this market for bravery. When you think that almost every asset class globally has lost money except the fixed income emerging market equities, developed market equities, emerging currencies, credit markets have fallen quite sharply; again that is both developed markets and emerging markets, the only asset class which is showing any positive returns YTD is fixed income and against that background there is an understandable air of caution.

I do not think there are any prices for being first into it. I am not saying it will depress sentiment, but for investors who are looking for an excuse not to put risk capital to work the elections may provide that excuse. Once they are behind this, the excuse can then turn very quickly into an opportunity.