Fed may deliver a 'hawkish' rate cut amid fiscal and political pressures, says Manulife's Marc Franklin

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At previous close, the Sensex was up 447.05 points (0.52 percent) at 85,712.37, and the Nifty was up 152.70 points (0.59 percent) at 26,186.45

The US Federal Reserve is likely to deliver a 'hawkish' 25 basis points rate cut, balancing inflationary concerns with its employment mandate, according to Marc Franklin, Deputy Head of Multi-Asset Solutions for Asia at Manulife Investments. In an interview with CNBC TV18, Franklin suggested that the market's expectation for a dovish pivot might be tempered by the central bank's forward guidance.

Franklin anticipates that Fed Chair Jerome Powell will underscore a data-dependent approach, signalling that the rate cut cycle will not be on 'autopilot' and will be decided on a meeting-by-meeting basis. "You might see the dot plot remove a cut from next year," he noted. The larger challenge for the Fed, he explained, is navigating the tension between a pro-cyclical fiscal policy, characterized by large deficits, and a monetary policy that may need to lean against it to counter resurgent inflation risks. "If you look at bond markets in the US, they're starting to discount that prolonged period of large fiscal deficits, a bit of rising term premium, higher yields," Franklin observed, adding that recent solid economic data gives the Fed reason to avoid committing to a series of automatic cuts.

Another complicating factor is the political pressure from the White House, with President Trump openly calling for deeper and faster rate reductions. Franklin said that Manulife is considering the possibility that markets might start to 'look through' current policy decisions and instead begin pricing in a post-Powell, more dovish Federal Reserve from the second half of next year. "Does the market really care so much about what the policy decisions are now… does it care more about discounting the likelihood that the complexion of the committee as well as the chair will change from the second half of next year onwards?" he pondered.

Shifting his focus to India, Franklin stated that he maintains a neutral stance on the country's equity market. He drew parallels with other top-performing Asian markets like Korea and Taiwan, which benefited this year from both a strong earnings cycle and valuation multiple re-rating. However, he believes this 'low-hanging fruit' of multiple expansion is now limited for these markets, including India. "As we roll into next year, it all comes down to the extent to which earnings growth and upward surprises around earnings momentum can catalyze fresh buying flows," he said.

Franklin also identified a key risk for India: its sourcing of crude oil imports. He warned that a potential shift away from Russian crude towards higher-priced alternatives could negatively impact the nation's current account position. This, in turn, could lead to currency weakness, a critical factor for foreign investors who assess returns in dollar terms.

Concluding with a final thought on the Fed, Franklin outlined a scenario where a dovish central bank could benefit short-duration equities, but the longer end of the bond market could see higher yields due to rising term and risk premiums. This dynamic could create diverse investment opportunities across the yield curve and influence which equity styles and factors perform well going forward.