Speculation over the US Fed hiking interest rate has led to foreign fund outflows from India over the past month.
Speaking to CNBC-TV18, Russ Koesterich, MD and Global Chief Investment Strategist at Blackrock says that emerging Asian markets like India are in a better position to withstand a likely Fed rate hike, because of lower current account deficit and fiscal deficit.
Discounting the Greece effect, he said global economy is doing reasonably well as inflation and interest rates were significantly low. With the Fed's move he expects some acceleration in the ‘slow but steady growth’ of the United States which would further support equity markets both in developed and emerging markets.
Meanwhile, oil prices would not rise sharply or fall significantly below USD 50 per barrel he said, adding “Oil is really caught right now between rise in international demand and the potential for more supply both from the US Shale producers and also potentially from Iran.”
Below is the edited transcript of Russ Koesterich’s interview with Shereen Bhan on CNBC-TV18.
Q: What is you outlook on equities and what impact will a possible fed rate hike have on the markets?
A: In the short-term the impact is not that large. We normally see some increase in volatility in the initial Fed hike, that is likely to be the case this time given the fact that we are currently at very low levels of volatility. So, to some extent you are simply reverting to the main. But the reality is interest rates are still generally low, we have slow but steady growth in much of the developed world and we are in an environment where equity markets can move higher albeit with more volatility that we have seen over the past several years.
Q: So, when you talk about more volatility, what should be expected and there has been so much focus on when the Fed actually moves and not enough focus on what happens post that move. What do you expect? If it is September and of course, we are clear that it is going to be a gradual move towards normalisation. What should we expect post that first hike?
A: Post the first hike, you are going to get some volatility; that normally manifests itself in some correction but not a particularly large one. There is some variation but historically, we figure about five maybe 10 percent, that would be a large correction. And if we have the hike in the context of rising inflation expectations, in other words, that real rates not rising as fast as nominal rates. That normally mitigates the impact of the hike.
What happens afterwards is more important than whether September, October, December an what reassured investors last week was the fact that the Fed lowered their expectations for hike in 2016 and 2017. What that tells investors is that even when you have lift off, this will be a very gradual tightening cycle and it should not be an insurmountable obstacle for equity markets.
Q: So, if you see volatility, what would it mean specifically for emerging markets like India, because there is always concern on whether we are going to see the large capital outflows out of emerging markets? Do you anticipate that? Do you believe that that fear and that concern is exaggerated?
A: That concern is largely baked into the price. We have already seen a significant correction in emerging markets over the past month; they have been down around 10 percent, some markets more. And the reality is that many emerging markets including India are in a much better position to withstand a Fed tightening cycle than was the case a few years ago.
Current accounts are generally lower, fiscal deficits are generally lower, we have significant reserve balances in much of Asia and then the follow up point is that we have had the benefit for many emerging markets of lower oil prices which credit a much more benign environment relative to what you have seen in 2013 or in 2014.
Q: And do you see that continuing as far as oil is concerned
A: We believe that oil is in a trading range. We do not expect a significant backup in price but I also do not believe oil is going to fall significantly below USD 50 a barrel. Where oil is really caught right now between rise in international demand and the potential for more supply both from the US shale producers and also potentially from Iran should a nuclear core be.
Q: So, how would you then see 2015? Do you see the markets correcting sharply in 2015 in the back drop of the Fed moving finally whether it is September or December and the kind of the correction that we are seeing in emerging markets specifically in markets like India for instance? Do you see that correction deepening significantly?
A: You may see more downside, but I do not think it is going to be particularly significant unless something happens that surprises the market, whether that comes from the Fed or perhaps an event in Europe. But for the most part, the fundamentals.
Q: Has Greece been factored in?
A: Greece has not been factored in. Now, our base case scenario is that there is no Greek exit. We think that the situation will be resolved albeit with probably a temporary resolution. If there were to be a more significant event in Greece, you would see some volatility around that. But the point I was going to make is that generally the global economy will not in great shape is doing reasonably well, inflation is low, interest rates are low, we expect some acceleration in the US in the back half of the year and that should create a fairly supportive market for equities, both in developed markets and we also believe in emerging markets.
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