Foresee two Fed rate hikes by end of year, none in June: UBS

Fed officials on Thursday said that they could raise rates as early as June. New York Fed President William Dudley reaffirmed that view on Thursday when he said the Fed could hike rates in June or July if economic data improves as expected.However, Geoffrey Dennis of UBS believes the Fed is likely to hike only by September and then later on in December --  two hikes by the end of this year. He is not surprised that the Fed has bought back the rate hike discussion on the table.According to him, Fed hiking rates could have some impact on FII inflows into EMs because the dollar would strengthen but may not be too negative. Already there have been net outflows out of the EMs in the last 3-4 weeks, says Dennis but the impact of the Fed decision still remains to be seen.On the tightening of P-Note rules in India, he says it could dampen the FII sentiment in the short-term but the increasing transparency could be good in the long-term.Below is the verbatim transcript of Geoff Dennis' interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Sonia: There is a bit of a concern about foreign institutional investor (FII) outflows out of emerging markets because of the impending Fed rate hike in the month of June. How concerned would you be? A: We have seen some net outflows over the last three or four weeks or so as markets peaked in late April and started to pullback a bit. I think the Fed has only come in over the last couple of days, so we are yet to see what impact that may have on the flows over the next couple of weeks. However, we had some pretty heavy selling in the last three or four weeks or so and now the Fed is definitely getting itself -- the poll we are getting is that the Fed may raise rates, so what is going to happen to the flows. It depends very much on what the market do from here. I do not think we should get too negative on the flows. Latha: I have two separate and related questions - 1) what is in your mind, the likelihood of Fed hiking rates and 2) if indeed that likelihood went up and the Fed fund futures started pencilling in 75-80 percent in the run-up to June, what would you worry about as an emerging market investor? A: First of all, we don't think the Fed will move in June. We just think that it's too quick relative to the Federal Open Market Committee (FOMC) minutes that we had yesterday. We do think the Fed will move in September though, so we are looking at the Fed rate hike. However, we are not particularly surprised that the Fed brought it back from on the table although they did it in dramatic fashion. We think what the Fed was doing is, it was just letting the markets know that the rate hike was still a possibility and they did that pretty effectively. So we do think that the Fed is going to move twice this year; in September and December. The rise in Fed rates is going to be bad for emerging markets to the extent that it puts the dollar higher and you have seen quite a nice balance in the dollar over the last couple of weeks as emerging markets peaked. So it depends on how much further the dollar could rebound on the back of Fed action. We do look for a huge Fed action. However, where EM goes from here will depend whether is there real growth in the global economy to get excited about and above all what will happen to the US dollar as we start to price in Fed moving rates later this year.Sonia: Since you look at India very closely, I wanted to ask your view on the Participatory Notes (P-Note) issue. Last night Sebi tightened the P-Note rules further by asking for know your customer (KYC), similar to what they do in the Indian market. Do you think these new rules could make P-Notes a bit costly to investors which could perhaps deter foreign investors or do you think that because of transparency improving, it is only good in the long run? A: I cannot express on the P-Notes specifically but I think it could have a slightly negative impact on flows in the short-term but you are right, increased transparency is only a good piece of news for the long-term. I think what is happening with respect to foreign investors in India. The market has lost momentum, it has rallied a little bit of its low indeed as market generally rallied but it has been a disappointing market this year and so the work that we have done, suggests that its gone from being one of the most credit market in relative terms in terms of foreign investor money until nine months ago, so quite a lot of money has come out, so a good news in India down the road some of that money would come back. So this is more of a cosmetic change for the long-term; it cannot be bad in the long-term. We just need a trigger to get people in the Indian market once again.