US Fed is playing second fiddle to govt policy: Bank Julius Baer

Oliver believes a Fed rate hike is a given, but the main issue will be the tone of the comment from Yellen.

Going forward in 2017, he prefers developed markets to emerging countries. His bets are on Europe and Japan, but that said, there is still an opportunity in the emerging world market.Below is the verbatim transcript of Mark Matthews and Shane Oliver's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: 2016 has been the year of surprises, we got it first with the Brexit then the US election, even in our own market we had the demonetisation, the Reserve Bank of India (RBI) policy that were all surprises, are we looking at any surprise from the Fed this time?Matthews: No, I think the market is looking for a rate hike and it wants one as a matter of fact. So there won't be a surprise, the only surprise would be if they decided not to raise rates which the Fed in the past threatened to raised rates and then they didn’t so. So maybe this time they are not going to but I don’t see why they wouldn’t because the economic data in America has been broadly positive and of course the stock market has been going up. So the environment is appropriate for a Fed hike.Latha: What will you watch out for, what would you have us watch out for in the Yellen press conference?Matthews: With the Federal Reserve, I don’t mean to be derogatory but I think that they are now playing second fiddle to government policies. So I am not saying that something truly shocking that comes out, I doubt the market will be that focused on a minutia as it used to be because there Donald Trump has inferred that he won't be continuing Janet Yellen's chairmanship in February 2018 and there are several other voting members who will be appointed by the President to the FOMC next year. So I don’t want to belittle it but I think it is important to somewhat wane in light of the Presidential election.Latha: If they were to signal a series of rate hikes all those things won't matter to markets?Matthews: I think the markets have already priced that in as you can see with rise in the dollar since the election and the rise in the treasury yields. So I don’t think that market will be surprised unless something exceptionally hawkish. Right now, the market is inferring this rate hike and then another two next year maybe three. So if they say that they are going to five then that would be a shock but I don’t think they will.Anuj: In that case, do you think the markets could be at the cusp of a rally because most of the worst of hawkishness could have been priced in. So once the event out of the way, could we have a big rally in equity markets?Matthews: You never know if it is a buy on rumour, sell on fact situation. What I am trying to say is may be the market has already priced in everything that we have been talking about in which case it sells off but I have to think as I said earlier that the attention is focused on the rhetoric around Donald Trump and on balance of course there is bad rhetoric pretending to China and trade sanctions but on balance the good rhetoric is more than offsetting the bad rhetoric. In other words, tax cuts and other pro-business talks so that is what is going to propel the market higher.Latha: What would you watch out for in the FOMC meeting tomorrow? Would it be just the rate hike, any Yellen speech that will be important to you?Oliver: I think the rate hike is a given. We will see that. The main issue is the comments from Janet Yellen -- rate hike has been gradual going forward, what she says about fiscal stimulus. So that would be the things I would watch out for.Sonia: What is your view now on the developed market versus emerging market trade because the Dow is less than 200 points away from that 20,000 mark and we have seen a stellar performance there but in 2017, what kind of trade do you see between developed and emerging markets?Oliver: The reality is that the developed markets recently have outperformed the emerging worlds. But probably that is a short-term reversal with the emerging markets that have results relative to developed markets at the moment. So that could see a bit of a reversal but I think as we go through 2017, my view would still be with the developed world Europe and Japan in particular over the emerging world. That said, there are opportunities in the emerging world, it is not as simple as saying one over the other. I think there are plenty of opportunities in the emerging world markets which have been sold down heavily where there is still value.Anuj: Wanted your thoughts also on the pecking order for emerging markets, where would India be?Matthews: We continue to like China and India and they are both very different but I think those are two favourites in the emerging space. Also, Russia is an interesting bet because when you look at all the changes in the world today, one country which seems to be coming out on a better position as Russia, the sanctions that were imposed on them in 2008 have ironically made their economy much stronger because they become more self sufficient and now the oil price is coming back. So, if you get the sanctions removed then it is in a sweet spot right now.Latha: What is the domestic view on India -- bottom up? There are some problems for the IT space because of Donald Trump's policies problems probably for banks because of the immediate problems of the currency swap, sectorally, bottom-up what do you like?Matthews: You are right that the H1B visa question is very much a sticking point with him. He is not giving up on that and I am not sure when he is going to get around to India. He seems to be doing China first but maybe that is some kind of negotiating ambit -- I don’t know. I think that is going to be problem for the technology companies.With the banks, I take a more sanguine view. I think that the demonetisation process will be looked back in the few months and won't be as bad as we thought. What we are seeing now that a lot of the money is going into accounts. But I am not pessimistic on India but I think the demonetisation might weigh on sentiment for a few more months.