Muted period of Fed activity; like Indian bonds: PIMCO

Latha: Is that your reading too, Fed unlikely to move in 2015?

A: With September out of the way, the focus has clearly shifted to December. However, it is very clear that the Fed is spending a lot of time focusing on overseas risk as opposed to domestic things.I am sure the Fed wants to get off the floor as soon as possible but they are data dependent and they are watching the markets very carefully and remember that the PIMCO view on rates is that the Fed isn’t going to be able to hike anywhere near 3-4 percent.So I think it is going to be very muted period of Fed activity going forward.

Sonia: Will it also prove to be a muted period for equities across the globe?

A: I think equities if people would back over the last three-five years, equities have had a tremendous run and I think it is fair to say that expectations of equity performance like we witnessed over the last three-four-five years is going to be very difficult to achieve. We certainly think there are going to be pockets of value in places like Europe and Japan because of quantitative easing (QE) mostly but not worldwide.

Latha: So the outflows that we are seeing from emerging market equities will continue you think?

A: Yes, I think what is important to note here when we are talking about outflows is that from a credit standpoint investors both emerging markets as an investment grade asset class now we are seeing this investment grade label being dropped in some countries towards high yields.

Don’t forget this is not a labelling thing, this is a risk thing. So EM is now in transition, securities are shifting from weak hands to strong hands but most importantly redemptions are not eliminations. The risk is still out there, it has just shifted someone else's portfolio.

Sonia: The global theme this year has been slower growth whether it is in China or even in markets like the US, do you think that bad news has been factored in to most global markets or can we expect to see a further price correction in global markets?

A: I think the most important signal we are going to get is this next quarterly earning season which kicks of this week. Clearly, everyone has revised down their growth numbers, official institutions are coming out with lower numbers for 2016 when everyone starts to get to that low number then maybe it is a good time re-evaluate what things might look like next year and see whether there can be any kind of new policy initiatives that might help.

Certainly we have seen investment expenditure and capital expenditure into the commodity world drop significantly everywhere. W e have seen very important emerging market countries like Russia and Brazil going to recession and they are facing very tough periods and also we are seeing the downdraft of what it means when China starts to slowdown structurally.

So yes, it is getting to a point where everyone needs to looks for the next earnings season and figure out how bad it is going to be for global profitability and what the companies are going to be doing over the next six-twelve months but probably we are reaching a point where the growth numbers are at pretty low levels.

Latha: This 48-hour rally we saw in across markets, will it have much legs?

A: I don’t know over the next 24-48 hours. If investors were very nervous before this move and were look in to lighten up positions, I think they should carry on doing that and clean out their portfolios and get into positions very happy with more longer-term, I don’t believe this is a significant turning point on a multiyear basis. This is just one of those liquidity driven relief rallies.Latha: To come back to the global growth point you were speaking about, we just got a report from Citi saying that the global growth this year according to their estimate is 2.9 percent, that is about the lowest. I think the international organisations are still sitting at 3 and 3.1 but what is your estimate of China, what is your own estimate of that country's growth this year and the next and is that discounted?

A: Yes, I think the question around Chinese growth is a tough one because clearly, the official target of 7 percent is going to be very hard to reach this year and certainly will be struggled next year. I think the consensus numbers are about 6.5 percent for the growth rate, we are below that number, we remain anywhere between 5.5 percent and 6 percent.So it just feels like a very low growth number given what is going on but it is still a very impressive number nonetheless. So we are below than the consensus on the growth rate.

Latha: This 5.5-6 percent is for this year, 2015 or 2016?

A: It is over 12 months following period from here.

Sonia: If global equities do not give you good returns this year, which is the asset class that could outperform from now for the next six-twelve months?

A: I think there has to be a big differentiation between whether investors are looking for growth or they are looking for income. I think there are lots of asset classes that offer income and even places in emerging markets offer good income and for very long-term plays and dividend plays in the equity market offer income. So capital gains, when you are having this kind of volatility, is going to take a while to pick up. I think emerging market equities in a long-term buy will start to look interesting.

Latha: Is there a growth play, I would assume a dividend play in the Indian bonds, how do you approach Indian assets?

A: In terms of India, I feel most comfort talking about the macro side and the rate side. It has been very aggressive rate cut of 50 bps we just witnessed bigger than a 25 bps that we were anticipating. Indian bonds remain attractive, they may not be as attractive as they were a year ago or two years ago. The cheaper oil price is helping the current account deficit (CAD) certainly.Narendra Modi is still seen favourably by the international investment community, though we are expecting a bit of an acceleration in reform process and you have a world-class governor at the Central Bank. We think that Indian bonds are backed by good fundamentals and we also like the currency given the current account concerns of debt is very high carry then it could be an issue there.

Now on equities, I will make a big confession, I am not an expert on Indian equities and don’t have a high conviction view on Indian equities but I think it has been a favourite asset class and I think international investors will probably favour it over a lot of other local, Asian equity markets but I genuinely believe that when the situation stabilises and settles down, India needs to focus on the structural reform process, getting the credit market working properly and it has to be a bigger belief that the policy framework is working to bring inflation expectations down -- all of these things will help the equity market in the long-term.

Latha: Yes of course but he put out a forecast of 4.8 percent inflation by the last quarter of next financial year early 2017, how much space do you see in terms of rate cuts?

A: I think they are probably done for this year and right now we are our reviewing our forecast for next year. We have had a significant period of easing over the last 12-18 months and if his real rate forecasts are getting it down to that 2-3 percent range then there is still lot more room on a multi-year basis to cut rates.