US GDP, jobs data make case for a rate hike: Credit Suisse

Parker also says emerging equities are expected to slightly outperform developed market equities.

Below is the verbatim transcript of Robert Parker's interview with Latha Venkatesh & Reema Tendulkar on CNBC-TV18.

Reema: What did you make of the jobs data and what does it tell you. Will we get a rate hike in September Federal Open Market Committee (FOMC)?

A: The Fed has very interesting problem because the Q2 gross domestic product (GDP) number is at 3.7 percent and the unemployment numbers which as we all know have now declined to 5.1 percent - that would argue decisively for an increase in the Fed fund rates. The problem that the Fed has is that inflation expectations have recently turned down and we still got headline inflation close to zero. They have an interesting problem on their hands.

My view is that they probably will raise rates based on the fact that they tend to look at domestic inflation factors rather than external factors such as the oil price or the strength of the dollar. I think certainly by the end of the year we will have a Fed fund rate at 50 bps. If they do not move over the next two weeks then it is certainly going to happen over the next two months. I think the overall movement is going to be one of a steady slow increase in the Fed funds rate.

Latha: What sense you are getting about volatility? We have seen so much of it in the past 8-12 weeks. Are we at an end after all those reassurances from the Chinese finance minister and People's Bank of China (PBoC) chief and maybe some clarity coming on September 17 from the FOMC? Will at least this completely killing volatility calm down?

A: The first point to make is up until July volatility was at a historic low and had stayed at a historic low, in fact it was unusually low and for most of 2014 and certainly the first half of 2015, you then have to ask a question why we have this jump in volatility and I think a number of factors - (1) the significant fall in commodity prices and (2) more importantly as we have discussed in the past, is serious investor concern about the state of the Chinese economy and the state of the Chinese market. Those have been the causes in this big jump in volatility against background which one has to emphasise that if one had looked at price earnings ratios for all markets back in May and early June, valuations were looking very stretched indeed and as a result the markets were vulnerable to hike in volatility and downward movement in prices and that\\'s exactly what we have had.

We are now in a situation where valuations are looking much more reasonable. So the PE for example on the S&P is now down close to 13. My view is that over the balance of September and going into the fourth quarter of the year, we will see not a return to super low volatility but it is reasonable to say that the volatility index (VIX) will settle down close to 20 and it is also fair to say that we are in the process of forming a base after this major selloff in all markets over the last eight weeks.

Latha: A slightly longer term question - are we in the throes of a slightly larger longer decline in risk assets. The message that seems to be coming is central bankers has tried and they have not been able to pump up the economy. The world is at a loss for ideas and China is definitely going to grow slower. Are there ingredients of some longer-term, larger risk off?

A: We at Credit Suisse produce annually what we call our capital market assumptions work, which is a five year projection on risk return for all asset classes. The latest work shows that the returns over the next five years in most fixed income markets either going to be zero or negative. The returns in most equity markets over the next five years are going to be between 5 percent and 8 percent. One has to go into some alternative assets such as private equity or real estate to achieve higher returns.

So the first answer to your question is, I think we are now in a longer term environment of lower returns but where equity returns will outpace very mediocre fixed income returns.

The second answer to your question is that there is a big debate at the moment as to whether central banks firepower is now exhausted and the answer to that is probably not and you saw the reaction last week. The positive market reaction to the European Central Bank (ECB) press conference where Mario Draghi suggested the quantitative easing, if necessary, could be increased. I would not agree with the statement that central bank firepower is exhausted. However, I do think that a lot economies notably Europe and States are putting too much reliance on monetary policy and running rather passive fiscal policy and just assuming that the monetary policy can fix everything and you and I both know very well that that\\'s not the case.

Reema: Has Credit Suisse also done analysis of what the expected returns from emerging equities as well as returns from the Indian equities could give in the next five-eight years?

A: I do not have the precise data in front of me but the answer is yes. And emerging equities are expected to outperform slightly developed market equities. Now, that is against the background of a major underperformance of emerging markets over the last two years relative to developed markets. However, one has to emphasise the huge divergence between emerging markets. We have got economies like India where growth is holding up at 7 percent plus. We have got economies like China which of low growth is okay. It is in a long-term slowdown and in two years time we could be seeing Chinese growth close to 5 percent in the days of 10 percent plus growth and China is well behind us than in other emerging markets notably Russia, Brazil, South Africa i.e. the rest of the BRICS, we have got serious economic and policy problems and Brazil and particularly Russia are in recession at the moment and in the case of Russia the decline in oil prices causing severe damage.