ET Now
In a chat with ET Now, Edward Teather, Sr Economist (ASEAN & India), UBS, shares his views on global equities and markets, including the Indian market. Excerpts:
ET Now: Do you think the run seen in US equities could be challenged at some point?
Edward Teather: I am not an equity strategist, but my colleagues in economics team in the US for UBS expect the Fed tapering to come around the closing of October. I think that is very much in line with market expectations. The big question mark, however, for the market is when will the Fed start to raise the federal funds target rate. In our view, that happens in June next year and then the Fed starts to ease, lift it all the way to 1.25% by the end of the year. We think that will have an impact on bond yields and US 10-year treasures will get up to 3.25% at the end of this year and 4% at the end of next. I do not want to comment on equities, but there is definitely going to be an impact on the market as a whole from the moves which I do not think are fully priced in yet.
ET Now: What are your thoughts on when Fed actually will increase interest rates?
Edward Teather: It is going to have an impact on the global economy and liquidity. The Fed is raising interest rates because the US economy is doing a bit better and certainly that process will affect those parts of the world that have been relying on the US and on the global liquidity being flushed.
However, different parts of the world have different liquidity cycles. The question for India, going forward, is when do interest rates start to come down, rather than how US rate hikes pushing interest rates up in India. Therefore, the liquidity parameters depend on where you are in the world.
ET Now: Considering that India stands out on the inflation front, how negative is that for Indian macros?
Edward Teather: India has stood out over the last few years because of its high inflation rate than elsewhere, which has also pushed up Indian bond yields relative to those in the US. The US yields have fallen over the last five years, whereas the Indian bond yields have crept higher over the same time span.
However, we are now seeing a change in the tone of Indian policy makers, who seem serious to tackle the inflation problem. Mr Rajan of the RBI has kept monetary policy tight, despite growth being softer than expected in prior quarters. Even the government has moved aggressively to try and prevent monsoon-related pressures on agricultural supply from breaking through to a much higher inflation. Ultimately, we think the work of the government and the RBI together will actually bring inflation down over the next 18 months and that will create some space for lower interest rates.
ET Now: Some brokerages do believe that we could get back to those 6% levels on GDP. What is your own estimate?
Edward Teather: We tend to take a little softer view on growth on average in FY15 and in FY16. We have pencilled in say 5.3% this year and 5.5% next. Now, there may be occasional quarters that makes it up, but as a whole, we do not expect the average to be strong enough for 6% GDP. We think that the authorities are focussed on getting inflation under control first, which is a very important building block to get a sustained acceleration in growth further down the line. There is also the need for balance sheet repair in the economy as well. We are not quite positive on growth rapidly accelerating in the immediate future. We, instead, look for inflation coming down first in a substantial manner.
ET Now: What to your mind will be the impact of geopolitical problems on global growth per se?
Edward Teather: The geopolitical problems are always potentially away. It is true that those concerns were heightened a few weeks ago and they have come off a bit. There is always a risk of their resurgence. The underlying issues behind all these political troubles have not gone away. However, it is interesting that markets have weathered the storm of the geopolitical concerns pretty well over the last few weeks and so as long as things do not get too extreme, there is a good possibility that this will be noise rather than something that really changes the direction of the global economy and markets.
ET Now: Do you think the run seen in US equities could be challenged at some point?
Edward Teather: I am not an equity strategist, but my colleagues in economics team in the US for UBS expect the Fed tapering to come around the closing of October. I think that is very much in line with market expectations. The big question mark, however, for the market is when will the Fed start to raise the federal funds target rate. In our view, that happens in June next year and then the Fed starts to ease, lift it all the way to 1.25% by the end of the year. We think that will have an impact on bond yields and US 10-year treasures will get up to 3.25% at the end of this year and 4% at the end of next. I do not want to comment on equities, but there is definitely going to be an impact on the market as a whole from the moves which I do not think are fully priced in yet.
ET Now: What are your thoughts on when Fed actually will increase interest rates?
Edward Teather: It is going to have an impact on the global economy and liquidity. The Fed is raising interest rates because the US economy is doing a bit better and certainly that process will affect those parts of the world that have been relying on the US and on the global liquidity being flushed.
However, different parts of the world have different liquidity cycles. The question for India, going forward, is when do interest rates start to come down, rather than how US rate hikes pushing interest rates up in India. Therefore, the liquidity parameters depend on where you are in the world.
ET Now: Considering that India stands out on the inflation front, how negative is that for Indian macros?
Edward Teather: India has stood out over the last few years because of its high inflation rate than elsewhere, which has also pushed up Indian bond yields relative to those in the US. The US yields have fallen over the last five years, whereas the Indian bond yields have crept higher over the same time span.
However, we are now seeing a change in the tone of Indian policy makers, who seem serious to tackle the inflation problem. Mr Rajan of the RBI has kept monetary policy tight, despite growth being softer than expected in prior quarters. Even the government has moved aggressively to try and prevent monsoon-related pressures on agricultural supply from breaking through to a much higher inflation. Ultimately, we think the work of the government and the RBI together will actually bring inflation down over the next 18 months and that will create some space for lower interest rates.
Edward Teather: We tend to take a little softer view on growth on average in FY15 and in FY16. We have pencilled in say 5.3% this year and 5.5% next. Now, there may be occasional quarters that makes it up, but as a whole, we do not expect the average to be strong enough for 6% GDP. We think that the authorities are focussed on getting inflation under control first, which is a very important building block to get a sustained acceleration in growth further down the line. There is also the need for balance sheet repair in the economy as well. We are not quite positive on growth rapidly accelerating in the immediate future. We, instead, look for inflation coming down first in a substantial manner.
ET Now: What to your mind will be the impact of geopolitical problems on global growth per se?
Edward Teather: The geopolitical problems are always potentially away. It is true that those concerns were heightened a few weeks ago and they have come off a bit. There is always a risk of their resurgence. The underlying issues behind all these political troubles have not gone away. However, it is interesting that markets have weathered the storm of the geopolitical concerns pretty well over the last few weeks and so as long as things do not get too extreme, there is a good possibility that this will be noise rather than something that really changes the direction of the global economy and markets.
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