Ahead of the beginning of the Federal Reserve meeting on Tuesday, Robert Parker - Investment Strategy & Research - Credit Suisse shares his views on what to expect from Fed, global markets going ahead.
Below is verbatim transcript of the interview:
Q: The recent string of weak data as well as the expectation of the US Q1 gross domestic product (GDP) coming near 1 percent indicates that the Fed may not raise interest rates until September. Do you think today could just be a wait and watch policy?
A: Absolutely. The point to make on the US economy is that we have had weaker economic data over the last two-three months. If you look at corporate earnings numbers, yes they have generally been good but it is mainly domestic companies, which have done well; companies which were exposed to the strength of the US dollar have been hurt, so we have now got close to 0 US export growth.
I think another factor is obviously with oil prices with West Texas Intermediate (WTI) less than USD 60 per barrel, new investment in high cost areas like Alaska has stopped and obviously production and new investment in the industry has slowed down.
Another point to emphasize is that the impact of public spending on the US economy this year will be slightly negative. So I think all those factors probably lead to Q1 GDP close to 1 percent and the rebound in Q2 and Q3 will be reasonably modest at around 2.5 percent maximum 3 percent. All of that suggests that any increase in interest rates by the Federal Reserve is going to be delayed and it is going to be very modest. So I stick to my view, my forecast that the Fed fund rates this time next year will be 75 bps and the first move maybe delayed until October.
Q: Since the end of QE3, the US markets have been fairly rangebound. Right now they are at the upper end of the range and sitting at the highs but if you see the Dow, it has moved in 17,000 to 18,000 even the S&P 500 has been moving between 2,000 and 2,100. What is your sense over the next one year? If we do get the first Fed rate hike in October, which is your base case scenario, what are the US markets likely to do?
A: Just to quantify the underperformance of the S&P, year-to-date (YTD) S&P500 is up about 2.5 percent, in contrast we have got the euro stocks up close to 20 percent, we have got the Nikkei up close to 15 percent then one has to contrast that and some of the top performing markets in the world like Shanghai Composite YTD is up close to 40 percent. So, logically we have seen the S&P underperform due to the end of QE. That has been factor one.
Factor two is the expectation that interest rates will be increased.
The other factor of course is that the negative impact on corporate earnings growth from lower oil prices and the stronger dollar. Now what is interesting is that this correction is the S&P relative to Europe and Japan now means that the S&P on a forward P/E basis is now cheaper than Europe.
So there is very strong performance we have seen in Europe, I don’t see it reversing but I do see it consolidating and the S&P over the coming months as interest rate expectations become somewhat more benign, the S&P could actually go through a catch up period.
Between now and the end of the year, I would be cautious on general equity returns but we could see the S&P up 5-7 percent but with Europe at least now showing modest gains as Europe is vulnerable to some profit taking.
Q: So in the run up to October, where would you look to deploy your money in this entire debate between the US or Europe or between developed and emerging markets? What are the markets that you would look to bet on?
A: In emerging markets we continue to like North Asia-China, Taiwan, Korea and despite this very strong rally in the Chinese market, there is further upside there.
In India we forecast a period of consolidation happening. That period of consolidation could go on for another few months before we get a late 2015 rally in India but it is too early to go back into the Indian market, we continue to like the Japanese market.
In Europe we are taking some risk off the table and diverting it back into the US so over the last three months we have been, I wouldn’t say negative on the US, we just thought we were going to go through a period of consolidation therefore, we had positions long Europe relative to the States. We are now taking some risk off the table in Europe and switching it back to the states.
Overall, by sectors one point which is very important is that globally cyclical sectors are the cheapest they have ever been relative to defensive sectors such as utility and consumer staples. So, building up position in cyclical sectors such as industrial companies, capital goods companies is exactly the right approach.
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