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Last Updated : Sep 19, 2016 04:56 PM IST | Source: CNBC-TV18

US Fed unlikely to move this year; equity markets at risk: HSBC

The equity market is at risk despite the rally seen since March, says Herald Van Der Linde, Head of equity Strategy, Asia-Pacific at HSBC adding that India is not an exception to that. A big move of volatility is expected in next couple of months.

The US Federal Reserve is unlikely to raise interest rate anytime this year, says Herald Van Der Linde, Head of equity Strategy, Asia-Pacific at HSBC. The US Fed might look at raising rates by middle of next year.

Markets, however, believes that the US Fed will raise rates sometime this year.

Speaking to CNBC-TV18, Linde says that long yield bonds are expected to move higher as central banks adjust their balance sheets. The banks are not buying as much as markets had earlier anticipated, which will reflect in bonds.

The Bank of Japan, which will also be meeting on Tuesday, seems to be quiet uncertain too. “We do not expect them to come out with any big bazooka or significant increases in asset purchases,” Linde says. While Japan is on a path to recovery, they are still way below their inflation target.

The equity market is at a risk despite the rally seen since March, says Linde, adding that India is not an exception to that. A big move of volatility is expected in the next couple of months. In this, the downside risk to India will be low as compared to other markets like Thailand and Indonesia.

Below is the verbatim transcript of Herald Van Der Linde's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Sonia: What is your view on the two Central Bank meetings that are upon us, the Federal Open Market Committee (FOMC) and most probably the Bank of Japan (BoJ) meeting where a lot of people believe that the BoJ could upstage the Fed this time around, what are your own thoughts?

A: I think that is Thursday morning for us. We don’t think that there are going to be anything in September. We think they are not going to do anything in December either though the market is clearly toying with that particular idea. So I think they are going to raise interest rates only in the middle of next year.

However, it is also important that what we see is not just that we see any particular changes on the short end of the yield curve, but we see long end of the yield curve, we see long bond yields moving a little bit higher as well. That is not because of interest rates expectations going up, it is more because of balance sheet adjustments across the Central Bank basically them not buying as much anymore as what the market initially believes. So there has been a steepening of the yield curve going through.

However, when it comes to raising interest rates in September, for the Fed -- we say no and in December -- we say no as well. It is into next year so that is to some extent quite positive. But the market is clearly toying with the idea that they are going to raise interest rates in 2016 and that is a slightly higher than 50-60 percent chance of that for the December meeting.

Then for the Bank of Japan, it seems to be quite uncertain what they are going to do as well but we are not going to see and we don’t expect that they are going to come out within the big bazooka and no significant increases in asset purchases from the Bank of Japan.

So, they probably mean continued strengthening in the yen as that news comes to the market and eventually, in Japan then we need to figure out what they are going to do because clearly, although growth is recovering a little bit and they must be happy with that, they are still very well below their inflation targets.

So at some point in time, they need to come to rethink of the existing policies from the monetary policy side or also working in conjunction with maybe infrastructure stimulus programmes on the fiscal side and that is something we need to use this upcoming meeting to see what they are planning to do as we go into 2017.

Latha: The HSBC note says that Asian markets, Asian equities react negatively when the US yield curve steepens. So what should we be prepared for, are we at near-term highs, are we at 2016 highs in a market like India?

A: For India in a relative basis might do okay but there is a risk towards equity markets. We have seen a very good rally since March this year across the whole region, India is not an exception to that, very close to all time highs, again in India that is no exception either but as the yield curve steepens a bit, I think the equity markets will get impacted by that, it will more or less be a credit event but equity markets will not be insulated from that.

I think we are going to have a bit more volatility over the next couple of months and probably some downward pressure on equities in general as well. Now certain markets are quite sensitive to that, Thailand, Indonesia among all of this. I think for Indonesia, it might not be as much as it used to be and other markets tend to perform much better. Taiwan in this case and India is somewhere in the middle of the pack I must say but on the margin, India -- the downside risk is not as high as some of the other markets.

Anuj: There is one view that the Fed is somehow not able to call the markets bluff and somehow keeping rates intact when it should have already taken a rate hike and maybe should do that in September, your base call is that it will not be this year but if that base call does not work out -- if the Fed indeed hikes rates, maybe in this policy itself, do you see big downside for the market or do you think this is a bull market and it will absorb the bad news?

A: If they would hike this week and the market is only attaching a 20 percent probability to that, that would be quite negative for markets. We are not positioned for that, the market is definitely not positioned for that. So that would be quite negative but given some of the weakest numbers we have seen quite recently, it is a bit unlikely that it happens.

But if we say let us close the scenario, they would be hiking in December on around the elections day as well, then the market is attaching a 55 percent probability to that. So that would mean probably that we need to digest higher rates in the US, that would also be negative for markets, maybe not as much than a rate hike later this week. That would be quite significantly better markets I believe.

Latha: Is the new man in Reserve Bank of India (RBI) a factor that you would factor in when you are choosing stocks, what are you all pencilling in, if there is one rate cut will that change your stock picking if there are two, will that alter your stock picking?

A: We believe that there is potential for rates to come down in India. So that is in a sense positive and is one of the reasons why we like India as well. Those are variety of reasons, which are important to that as well.

What we also need to see is -- late last week there was certainly this talk about devaluation in the currency and things like that and that created some jitters. So what we need to see is basically, that on the economic front inflation comes down and allows to cut interest rates, that would be a positive. We also need to see very consistent message -- not to dissimilate to what we saw from the previous governor in terms of what the direction is of interest rates and currencies. So that is two things I would look for but on the margins, both these factors as well as communication is good -- it should be positive for Indian equities.

Sonia: I was going through your long-term structure themes in Asia and for India particularly you like some of these infrastructure stories like Larsen and Toubro (L&T) and your target price on L&T is Rs 1,700 so it is a big upside to the current market price but we were just speaking with a couple of bankers earlier and they indicated that they are not seeing too much of a pickup in the capex cycle, are you noticing anything different?

A: No, I don’t think so. The capex cycle in India is not a life yet. I think for a sustainable pick up in that capex  cycle there -- what we need to see is that there are some issues in the banking system getting resolved as well and that will take a couple of years. This is why this is important because it seems for the longer run. While I don’t expect that the capex cycle will pick up in the next couple of quarters, I do think on a five year basis or so, it is very reasonable to assume that it will pick up. The government is putting the right policies in place for it to recover. Then a company like that would do very well.

What we are very excited about across the region, it is also somewhat India specific and there might be from quarter-to-quarter fluctuations in that but you can buy high quality companies in India, they give you exposure to that. So if you want to invest and not trade in the market, for longer run, those are some of the themes I think you should be looking at.

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First Published on Sep 19, 2016 10:42 am
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