See Dollar Index rising 5%; wary of EMs for 6 months: AMP Cap

US market, post the Trump rally has taken a breather and indices slipped 0.3-0.6 percent. Moreover, there are global events like the Italian Referendum, the FOMC meet lined up in the month of December. So the big question now is how one should map the global set-up.

Shane Oliver, Head Investment Strategy & Chief Economist, AMP Capital Investors believes a market never moves in a straight line. The Trump rally got to a point where the markets were technically overbought. However, seasonally December has been a strong month but in the latter half.       

So for now, markets are in a bit of a pause until maybe the global events pan out, says Oliver.

He also believes dollar index is likely to see another upside of 5-7 percent from here on but the stimulus promised by the trump government would only come in by the second half of the year and so in-between dollar could weaken a bit.

With regards to FII selling witnessed in most emerging markets, he says the rising dollar strength is negative for EMs and so the trade of being pro-developed markets and short EM would continue for some more time.

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Shane Oliver

Head Investment Strategy|AMP Capital

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However, over a period of time if there is more confidence in global growth then emerging markets would definitely benefit but for now, he too is cautious on EM space at least for the next six months. But one cannot put all EMs in one basket because markets like Indonesia, India and China have lesser risk than others.elow is the verbatim transcript of Shane Oliver’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18. Sonia: How are you looking at the last two months of the year because we have seen a lot of volatility up until now and now the Trump rally is also beginning to fade across the US markets, how are you approaching it? A: I think the reality is that the Trump rally was a very strong one and the markets got to a point where they were technically overbought. Markets maybe going in the straight line forever, they usually get to a point where they go to an extreme and you get through a bit of a consolidation. However, we are coming into a seasonally strong month; December is a strong month but normally that strong seasonality usually gets underway later in the month, the last two weeks of the months around Christmas, New Year. And I think at the moment we are just going through a bit of a pause as investors are conscious that we do have these events coming up. As you referred to, we have got the Italian Referendum, we have got meetings from European Central Bank (ECB) and the Fed and I guess a few other things going on and that sort of pushed investors back to the sidelines. Of course this week the Organization of the Petroleum Exporting Countries (OPEC) meeting but I really think this is just a pause that will see further strength into year-end given that economic indicators globally have been quite positive, given that the profit recession is over in many countries including the US and monetary conditions remain very easy. Latha: What we have been seeing since Trump victory day, since November 9, is a pro developed market (DM), anti emerging market (EM) or a short EM trade. Has it played out or is there much more of that to go? A: The danger is that that could continue. I think the problem with the - the core of it is that US will use more fiscal stimulus to support the economy and that will be driven by Trump\\'s policies on cutting tax rates and infrastructure spending and that will result in a faster tightening by US Federal Reserve which will mean ongoing upwards pressure on the US dollar and invariably when that occurs it can be a negative world even though it is positive in the US from the stimulus and also positive to Europe and Japan which benefit from that falling US dollar for the emerging world where there US dollar denominated debts, a rising dollar can historically be a negative for that part of the world. So, I suspect that trend continues but by the same token you have to be a little bit careful here because it is dangerous lumping the emerging world altogether in one basket. There are parts of the emerging world which are somewhat less at risk. China for example, India, Indonesia are countries which can probably ride this through and through without being adversely affected. Then there is also if we get some points for next year in confidence regarding global growth continues to build, then the emerging world will start to benefit from that but for the time being I would be a little bit cautious with the emerging world.

Transcript to follow...