Long-term rates in US to rise: JPMorgan Asset Management

The FOMC meeting seems to be preparing the market for taper, says Richard Titherington, MD & Head - Global Emerging Markets, JPMorgan Asset Management. His own view is that it could start early 2014.

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He sees a steady rise in long-term interest rates in US hereon as the economy continues to strengthen.
Titherington says even though emerging markets have been forewarned about tapering, their currencies will still be under pressure. But the reaction won't be as dramatic as seen in August. 
"We should expect markets to be more volatile than they have been in the last couple of years and I very much see India as a part of that. I don't expect a return to currency crisis condition that we had in summer," he says. Below is the verbatim transcript of Richard Titherington's interview on CNBC-TV18 Q: The Federal Open Market Committee (FOMC) minutes seem to indicate a willingness on the part of the Fed to go ahead and taper in anticipation that data will come as strongly as the Fed estimates. Yet the more recent statements and the inflation data that came in yesterday, expect that dovishness will continue. When do you expect tapering to start?
A: Obviously it’s difficult to know when tapering is going to start, but one should expect tapering early next year although there are parts of US economy that is performing well, unemployment is still a problem but Fed is preparing the market for beginning to the tapering process. Q: Following the FOMC minutes we have seen a spike in the dollar index and in US treasury yields. Do you see both these indices rising more from now to end of 2013? I mean will US 10-year yields for instance be closer to 3 percent mark by end of this calendar?
A: You have seen yields rising in the US and as the economy strengthens that process will continue, I think we should see a steady rise in long-term interest rates in US both to the end of this year and through the first half of next year. Q: We have seen some mellowing of emerging market (EM) currencies and equities but so far there have been no deep cuts. If and when tapering becomes a present danger, how badly may these assets react?
A: Earlier this year we saw EM currencies reacting very badly to first discussion of tapering. I would hope that markets have been forewarned so I do not expect the same dramatic reaction that we had earlier on in the year but clearly tapering is going to put EM currencies under pressure. Q: India’s currency has stabilised since the month of August, but it’s the stocks markets despite the sharp gains in September and October has become very volatile in the month of November. How do you see them trend for the rest of this year, and more important for the first half of 2014?
A: I think the volatility is here to stay. In an environment of rising interest rates and tightening monetary policy, we should expect markets to be more volatile than they have been in the last couple of years and I very much see India as a part of that. I don’t expect a return to currency crisis condition that we had in summer. The currency will fluctuate but you won’t see the dramatic swings that we saw earlier this year. As far as the market is concerned, I am optimistic for the outlook for the Indian stock markets. Q: How important is the election in your India decision-making: would you want to move into cash ahead of the elections or in fact invest more in the hope that things may get better?
A: It’s very difficult to predict how elections are going to go. I think the markets as we get closer to the elections will be influenced by opinion polls and political commentators. In my view, the election itself is a positive in the sense that when we have new administration that will provide a basis for investors to focus on longer term outlook for markets rather than focus very much on the short-term.