See 50% chance of Fed tapering in March: Macquarie

Q: All eyes are on the Federal Open Market Committee (FOMC). It is going to be Bernanke's last policy. Do you think he is just going to wait for the next Fed head to come and decide on taper and possibly not talk about taper at all this policy?

A: It would be wise on a couple of grounds. Firstly, Janet Yellen - as the incoming chairman - really has to take ownership of the policy and a change in the stance with US monetary policy, such an important one and secondly, they will want to see more data and at a time of the year where as far as seasonal liquidity is concerned there are some downturns in market liquidity which typically accompany the December, early January period. So my suspicion is that they will obviously offer some forward guidance on where they are heading. There will be a revision to some of the forecast, but I do not think there will actually be a decision taken to alter the stance of monetary policy at this point.

Q: What is the call on emerging markets and markets like India in particular?

A: Certainly that gives the emerging markets an additional period of respite from any threat to a renewed traders capital outflow and a continuation of that relative stability that we have seen for the last month or so in emerging markets, in particular India which means that we head to outturn of the year in a fairly well supported way and with a reasonably right position in terms of capital accounts and capital inflow.

Q: How are foreign investors actually positioning themselves on emerging markets such as India? Are they more sanguine about domestic factors such as elections and hence positioning themselves based on that or is the taper talk a big factor for them, not to be too aggressive on likes of India?

A: The taper talk is still an issue for caution as you correctly point out, not just in India, also in Indonesia and South Asian region as well. So they cannot afford to be complacent. On the domestic policy or political front I was in Asia last week and particularly in Singapore I was quite surprised at just how sanguine investors are at the prospect of the Indian elections in May next year. I think there are some bigger policy issues out there that we maybe getting distracted from in relation to the election cycle and so you will also need to be a little cautious on that front as well. But clearly companies that have a good industry structure, good gearing levels and good cash flows are going to be favoured and those that have been excessively sold down at the height of those capital outflows also present value.

Q: What would be your own pecking in terms of Asian and emerging markets?

A: We do still like the Indian trade back story and particularly with a protracted period of inaction in relation to the US Federal Reserve. Singapore is also starting to comeback and certainly anyone who had been concerned about the construction pipeline can have those fears allayed. We are also seeing some reasonably good comeback on the Asian side also.

Q: What would your call be on the taper timeline? Would it then head into next year? Do you have a definitive call on it or would you wait and watch once the new Fed chief comes in?

A: We have a 50 percent probability on March of 2014 for the commencement of tapering by the US Federal Reserve and we have reaffirmed that 50 percent probability in the last week and we stick to that, notwithstanding surveys of market commentators coming in showing an increased proportion that tapering will commence on the next day or so and that is really weighted on the view that the world market is not quite as strong as a lot of people have been making out. Also, new incoming chair Janet Yellen needs to take ownership of this change in the stance of US policy.