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Good chance to up India stake; Fed may stand pat: Manulife Asset

It is a very good opportunity for investors who can look beyond the next 3-6 months to increase their exposure to India because it really does have fundamentals which are better than almost any other large emerging market, says Geoff Lewis, Global Strategist, Capital Markets Group, Manulife Asset Management.

In an interview to CNBC-TV18, Lewis says the Fed is likely to take a dovish stance on interest rates going forward.

“I think the markets will be expecting some kind of view from the Fed on the turmoil that we have seen in January, some kind of reassurance that the Fed realises that global investor confidence is fragile and possibly, economies are a little bit fragile,” says Lewis.

Below is the transcript of Geoff Lewis’ interview with Anuj Singhal and Ekta Batra on CNBC-TV18.

Anuj: It is looking much better over the last three or four days than it looked for a better part of the first fortnight of 2016. But, what is your sense? Have equities found a bit of a near-term bottom or is this just one of those relief rallies which should be sold into?

A: I think still oil is the key and Jack Frost seems to have come to the rescue with some very cold weather in the Northern hemisphere and that is encouraged by the boost to oil prices. But, of course, that is just a blip. I think the fundamental supply-demand situation has not changed very much. But, it is now beginning to look in the developed markets more like a normal market correction. There were a lot of things to worry investors at the start of the year. We expect the Fed to stand pat this week. They are going to be very gentle in their approach to interest rates. So, hopefully, investors will recover some of their poise. The correlation we have seen in daily movements between the Standard and Poor (SNP) 500 and the oil prices is extraordinary. I mean in terms of fundamentals, it is not warranted.

Ekta: You said that the Fed is going to stand pat or most likely this week. But in terms of commentary, what are you expecting from the Fed. How important would the commentary be? What are your expecting from it? And how market moving do you think it would possibly be to assuage investor concerns as well?

A: That is a very good question, because I think that is going to be key. It is going to be communication skills that is what the Fed has got to demonstrate this week. And I think they will not be able to leave the wording largely unchanged from the last time. I think the markets will be expecting some kind of view from the Fed on the turmoil that we have seen in January, some kind of reassurance that the Fed realises that global investor confidence is fragile and possibly, economies are a little bit fragile. The market will want to see that reassurance and I would imagine that the Fed is very busy drafting an appropriate form of replay right now.

Anuj: What about India? We have seen a fair bit of correction in the Indian market, but do you think from these levels, the Indian market can give decent returns?

A: I think it depends on your time horizon where we have been very much in risk-off and everybody agrees that India has got better relative fundamentals, it has got a great long run, domestic secular growth story. It has got GDP increasing, it has got cost of inflation, it has got interest rates coming down, it has got a wonderful bond market. But, India has fallen a little bit less than the other markets year-to-date, but it was still down about 8 percent when I looked at it. So, very much a risk-off episode, but I think the fundamentals are there.

Importantly, the current account deficit has fallen so rapidly over the last couple of years. It is now funded more or less entirely by foreign direct investment. So, India is not so directly dependent in the capital account sense as far as the currency is concerned on portfolio flows. It is a very good opportunity for investors who can look beyond the next 3-6 months to increase their exposure to India because it really does have fundamentals which are better than almost any other large emerging market.

Ekta: Bank of Japan (BoJ) also meets. Your sense in terms of what they could possibly do this time around in terms of the meet?

A: I think they will be wanting to keep their powder dry on this occasion. There have been some suggestions that they cannot keep on increasing their share of the Japanese Government Bond (JGB) market. It is already up to 33 percent as easily as they have in the past. And they have postponed reaching their inflation target now to six months ahead of March, 2017. So, I really think they will want to keep something in reserve. So, there could be a little bit of disappointment in markets with regards to the BoJ, but I think the majority are resigned that there will not be further significant announcements from BoJ on this occasion.

Anuj: Not, from BoJ, but going forward, with the kind of market reaction we have seen, what can we expect from the Fed over the course of the year? And could that be a bit of a game changer?

A: You have got two camps. There are those who say you must get on with it and normalise because of the unintended consequences of exceptional monetary policy and there are those who are saying with confidence obviously, so fragile, a fragile recovery outside the US, they need to take international considerations into account also. I think they will not want to be seen to have torpedoed the global recovery so, they have just dabbed their foot very slightly on the breaks and they will wait and see a few months and then you might just have one or two more increases at most, much lesser in a year.

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