The Hindu Business Line : HSBC sees risk appetite returning in emerging markets

They did downgrade their language on both the recent indicators, as well as on the housing sector, suggesting that the housing adjustment is going to continue; they also suggested that their biggest concern is still inflation and that they are beginning to be concerned about growth too.

Most importantly, they dropped the tightening bias on the policy statement, which suggests the risk of Fed tightening is pretty much out of the window now and that the Fed may start to focus more on growth concerns from here.

When do you think they will first move on the interest rate front next and do you think it will be a cut?

Our forecast is for a cut in September being the first move; we do think that growth in the US is going to slow down this year and that the housing adjustment is going to have a negative impact on consumer spending and will lead them to focus on trying to stimulate growth.

Has the Fed statement this time around left the market more confused, because inflation is seen at an elevated condition now but they have left the room open in terms of rate tinkering?

The point is that the Fed is expecting inflation numbers to be moderate, which should allow them to get away without the tightening policy but the statement is still very much hedged; it is still very data dependent and therefore if we do not see that moderation of inflation coming through, then they will have to go back to the drawing board and raise rates further sometime down the line. So, they have left themselves open at this stage.

How should an emerging market investor read all this? Should you be saying that if the US economic growth actually slows down more than expected, we need to worry about that or should they focus more on rate cuts, which might open up more liquidity into emerging market later in the year? Which is more important according to you?

I think the latter; our general feeling is that the emerging markets are at least a little bit less dependent on US growth than previously. If there is a weakening of the US economy and a fall of interest rates, it could tend to push up the currencies of the emerging markets, which could give you some room for interest rate cuts and greater liquidity growth. So I think on balance, it is probably a bit positive.

Where do you see global funds moving then because the Bank of Japan has spoken already, while the Fed has left things unchanged? Can any material impact or change happen in terms of flows?

I think this probably will encourage flows back into the emerging markets, after last month's correction phase. So it does suggest that confidence and risk appetite is beginning to return to the market a bit.

However, we still have to watch the US numbers quite closely and if we see signs that growth may be slowing a bit more, or that inflation is not cooperating, then we might take a bit more negative view of things.

What is your call? Is it a very short lift correction in the emerging markets this time?

That is a bit hard to say. Most of these corrections tend to last a couple of months or so and I think we are only into the first month so far. So I wouldn't say they are completely out of woods yet but certainly the reaction is quite positive.

Didn't see any mention of the sub-prime delinquencies. Has the market overdone those concerns or are they warranted?

I suspect they overdid them in a short-term; we still have to wait and see how that develops, but it still is not that big a segment of the overall borrowing market and therefore probably the initial reaction was a bit excessive.

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