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What would Fed hike mean for EMs? ‘Nothing but bad news’

In an interview with CNBC-TV18, Michael Every, Head of Markets Research, Asia-Pacific, Rabobank, outlined his rather cautious view on what could happen if the Federal Reserve hikes interest rates for the first time in nearly a decade this week — which in all likelihood it will.

Below is the transcript of Michael Every’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18.

Anuj: Can it be assumed that rate hike is a certainty and the bigger question, what happens to emerging markets post that?

A: There are no certainties in life apart from death and taxes, but it is certainly looking like a probability. There is probably around a 75 percent chance priced in by the market and I would say that it is probably right, overall.

What does that mean for emerging markets? I am afraid it is nothing but bad news. We have not seen a Fed tightening cycle that has been friendly for the markets from the start. And friendly for emerging markets in particular for a very long time, probably before both you and I were actually doing this job.

So, anyone expecting the emerging markets are just going to shrug this off really has not read any of their market history, I am afraid.

Ekta: We have something to cheer about in India. We have managed to recover after a little bit of a gap down opening that we had and we are now trading very comfortably in the green. Your sense on whether India is going to be resilient because of our reserves, because of the fact that crude prices are lower, all of that is going to aid us to be resilient in case the Fed does hike rates?

A: I still think India is best placed to do well if the Fed hikes rates, clearly because as you said, a lot of the negatives which immediately result from that such as lower energy prices lower commodity prices and so forth, actually are a positive for India.

So, in that respect, I cannot see how one could lump India together with all the rest of the emerging markets generically. One has to drill down and see who stands out.

But let me just reiterate something that I have said time and again that outperformers does not necessarily mean that you are in the green. It can just mean that you are in the red to a lower degree than everybody else or a lesser degree.

Ekta: What is your sense in terms of the rupee then because we have depreciated around 6 odd percent for the entire year, but that is much more resilient than the Russian ruble and all the other currencies which are very vulnerable to oil prices. Do you expect the resilience to continue, particularly for the rupee or do you think that there could be incremental weakness which could come in?

A: It could nudge down a little bit from here and yes, we have definitely seen a decline over the year. But, if you consider that Indian inflation is still not insignificant, in inflation adjusted terms, it has not actually moved down that much at all.

And considering how strong the dollar has been since the middle of the year, to actually suddenly see they have only gone from 64 to just across to 67 to the dollar as I speak now, it is not really hugely significant.

Psychologically, that 67 to the dollar figure is not such a positive, but I simply do not see the weighted downside pressures on the rupee that I see on many other emerging market currencies such as the Malaysian ringgit, for example.


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