The Hindu Business Line : `With Fed on pause, one can be in riskier assets for time being'

Mr David G Fernandez, Head of Emerging Asia Economic & Sovereign Research of JP Morgan, says that the Fed may not tinker with rates for the next couple of meetings. He also says that the US economy looks resilient going by the data on durable goods and unemployment.

He says that they are likely to reassess the emerging market strategy later. He further adds that the geopolitical scenario and oil prices remain a concern, and looking ahead, he says that WTI crude prices are seen at $65-70/bbl in early 2007.

Excerpts from CNBC-TV18's exclusive interview

How have you read the latest data from the US and what is it pointing towards?

The latest details from the US are a mixed bag. The housing slowdown is certainly occurring quite rapidly across all parts of the country. But, on the other hand, there are some very encouraging signs. With the durable goods report that we saw last night, a retail sale report we saw several weeks ago and with jobless claims being low, I think I would still stick to a view of resilience for the US economy. But this is a minority view; there is a very wide disparity on how to read the data.

If the view is that it's showing resilience, does it also follow that you expect that maybe we have not reached the end of the rate hikes from the Fed?

I think that the Fed is watching data and debating internally, the way we are in the markets. So the only thing one can say with certainty is that the Fed is staying out of the game for now. That does give the market a heads up, at least for the time being and I think that's what is happening.

If they do stay out of the game then what is the big cue for global markets at this point and how would you map the liquidity situation for the next six months or so?

I think six months is a bridge too far. I would break it up into two to three month chunks and think about the next couple of months with the Fed on pause. I think liquidity overall is good. The question is what you do with it. Do you just sit with it in the way that most people had been coming out of their May June correction, or do you put more of it to work.

I would say go for it now while the Fed stays out of the game. I think putting more money into risky assets is what we are increasingly seeing people do. Now as we get to the end of the year, the six-month period that you are asking me to look at, I suggest being very nimble. If I am right, and the US economy shows itself to be more resilient, in the mean time the rest of the world, the European countries, Japan and the rest of us here in non-Japan Asia, look pretty good.

By riskier assets do you mean emerging markets like ours? Have you seen evidence of new funds or existing funds pumping in more money now?

Absolutely. We have seen that net inflows into India over the past several weeks are increasing. Indonesia also has been receiving a lot of attention. I think people realised that if what we are saying is true and we only have a small window here to make up year-end targets for returns to clients, now is the time to go for it. And we are seeing more evidence of that. Having said all of this and encouraging people to put more risk on the table, we are still seeing it in limited size. It is still of course the summer, we have not even got into the official end of this summer. Liquidity is still reasonably thin, bets are pretty small but I think as we get into September, we could see those bets increase again.

Some of your peers seem to believe that the worst is over for emerging market equities, at least in the region. But you are saying that no, it may just be a relief phase and the weakness will claw itself back in some while from now?

Our strategy on emerging market equity is to put more risk on the table now, and we will reassess this later. I think that is the right strategy. Again the reassessment three months down the road is something that everyone can live with. The issue is `what to do today'. I think the signal there is that during this pause, it is a time when markets can be fairly confident. With the Fed out of the game, one can be in riskier assets for the time being. I think a couple of months is quite a long stretch for most fund managers to think about, and I do not think this is the time to be tentative.

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