Sep 15 2013 , Mumbai
There are several conjectures as to how, and if at all, the US Fed is going to withdraw its huge stimulus programme now. Either way, it will have a bearing on the emerging markets, like India
At present, the US Fed prints dollar at the rate of $85 billion a month to support the economy and there are expectations that this rate may be lowered to $65 billion or $60 billion at this week’s meeting.
Then on Friday (September 20), the Reserve Bank of India (RBI), under its new governor Raghuram Rajan, will meet for the quarterly review of the monetary policy.
Septaper — September tapering or reduction of the massive financial stimulus programme — has been playing tantrums with stocks, bonds and currencies across emerging markets after the Fed first indicated of its withdrawal plan on May 22.
The fear for emerging markets, such as India, is that even a small withdrawal by foreign portfolio investors can have a big impact on stock prices, as overseas investors own over 40 per cent of the floating stock. Most of the emerging markets have stabilised after the macro-economic data for the US, especially employment data, gave mixed signals. The fear of a US strike on Syria also subsided, calming the nerves of investors.
In a mixed employment report on Sep-tember 6, the US said it added 169,000 jobs in August, slightly lower than expectations of 180,000. One of the reasons for the fall in unemployment was that the number of people looking for work fell from 7.4 per cent to 7.3 per cent (down from 8.1 per cent a year back), complicating matters for Ben Bernanke, the Fed chairman, while taking the crucial decision this week.
In a note dated September 12, Bank of America-Merrill Lynch said it believed the Fed tapering will be ‘modest’. “After Lehman…came unprecedented global monetary stimulus. Wall Street has soared, but Main Street has soured. QE was the prime driver of the 2009 trough in stocks. The 2011 trough in real estate and liquidity withdrawal led to a jump in global interest rates in 2013. A further rapid jump in rates would destabilise asset prices. But we think this threat would be low in the coming quarters,” BoA-ML analysts led by Michael Hartnett wrote.
“We believe the Fed tapering will be modest. We’ve just raised our GDP forecast for China and as long as 4 per cent acts as the autumn ceiling for the 30-year treasury yield, the ‘bear market rally’ in credit and emerging markets can continue to erase some of the painful summer losses. Our core great rotation strategy remains biased toward stocks over credit, value stocks over growth stocks and developed markets over emerging markets as macros, interest rates and asset allocation normalise,” the analysts said.
In a note to clients, Benjamin Yeo of Barclays Wealth’s Global Research & Investments said the causal link between quantitative easing and an improving economy had yet to be established directly. Arguably, the QE programmes of yesteryears might have arrested a spiralling slide in business and investor sentiment from the throes of the crisis, thereby indirectly averting further economic deterioration. However, there is no validation of the fact that they had a motivating influence on increased economic activities,” he wrote.
“Correspondingly, the reduction, or even removal, of QE should have a muted economic impact, especially if managed over a period. Moreover, central banks would not be contemplating or/and executing tapering – and ultimately an exit – of its QE programme if the economy continues to flounder. Besides, contrary to current market preoccupation, the yield curve – both the short and long ends — functions to discount and reflect the reality of the underlying economy, and not as a direct cause (at best, only indirectly) of any economic developments or deterioration. In addition, investors may have underestimated the economic resilience and improvements made in recent years,” Yeo said.
“Expectedly, with any economic/market events/issues, investors necessarily need to undergo periods of denial, acknowledgement and digestion before stability or/and normalisation return. Notwithstanding the current negativity, as we approach the Federal Open Market Committee meeting, the above issues will eventually come out in the wash, in tandem with a more-entrenched economic recovery. To this end, the ‘glass half full and filling up’ rhetoric will also gain more traction, which bodes well for the longer-term outlook of risky assets, especially equity,” he said.
While we have had a good dose of central bank-aided liquidity over the past five years, from the US Fed to the European Central Bank and from Japan, we may not see any such big support in the next five years.
“Asset markets will not do as well in the next five years, no matter what ‘nouveau bulls’ say. Central banks will be less generous, corporations less selfish. And should excess liquidity be quickly removed, markets will get ‘crashy’,” the BoA-ML analysts wrote, asking investors to ‘curb their enthusiasm’.
But several big market gurus expect the US Fed to postpone tapering or even hike bond buying. For instance, Marc Faber, a global investment guru, said he believed the US economy was weakening, and “if it gets worse, they (the Fed) will have to even increase the purchases, may be even to $150 billion a month.”
In an article published in Financial Chronicle’s Weekend edition, Shankar Sharma of First Global asked himself: “What happens now with the QE tapering looming?,” before adding: “My view is that over the course of the next few months, global markets will sell off massively. And this will lead to QE4, sometime in the fall of 2014. There is simply no other option the US has, in order to keep the home fires burning.”
Surely, the Indian central bank will be closely watching and reading everything Ben Bernanke and Co will say on Tuesday and Wednesday, before deciding on what to do on Friday.
Ambit Capital, a local broking firm, said it expects RBI to partially relax the non-traditional measures administered in July while delivering a hawkish statement, which is likely to be accompanied by a repo rate increase of 25 basis points (assuming that no negative surprises emanate from the US Fed’s policy meeting).
Will it be ‘taper tantrum’, ‘taper lite’ or ‘Septaper’? Well, my guess is as good as yours. zz