Zero rates negative for growth, but Fed liftoff unlikely this year
Christopher Wood, MD & Equity Strategist, CLSA .
Nov 18, 2015 | Source: CNBC-TV18
World View: We are still in this global deflationary environment, where we have central bankers in the developed world pursuing unorthodox monetary policies. The ECB is signaling that it is going to expand the quantitative easing programme. There is a growing possibility of more quantitative easing or increased quantitative easing in Japan. So we are a long way from normalizing the monetary policy.
Interest rate hike in U.S.: Although my base case remains that there would be no rate hike this year, I have to admit that the possibility of a rate hike in December has definitely increased. The key reason for that is not better job data, it is the wage data.
On zero interest rate regime: My personal opinion is that these quantitative easing policies are misconceived. In my view, zero rates are negative for growth. Quantitative easing increases deflationary pressures.
India is the best relative stock market: I am not too surprised that I am still a big overweight on India. But I would have to admit that the investment case for India right now is much better in a global portfolio from a relative standpoint than in absolute returns standpoint. India is a good relative story.
What do you make of the latest economic reforms? Well, I have not looked at it in detail, but I think it is very encouraging that the government has announced this scheme. From my first look at the scheme and the discussions I held, this scheme seems to have something that previous efforts to clean up the SEB distribution issues did not have. It involves both stick and carrot. This is a positive development and it follows on from other positive developments of the past year when coal production increased.
View on India: Well, basically the market will probably continue to trade sideways until we have evidence of a pickup in the investment cycle; that is my key point. When we get evidence of a pickup in the investment cycle, there would be a very significant upside in the Indian stock market. But my base case is that we still have a risk of earnings downgrade. Hopefully, we are coming to the end of that process, because the earnings downgrade can be offset to a significant degree by further monetary easing. At the start of this year, I would say a minimum of 200 bps of monetary easing in 2015 and 2016. We have so far had a 125 bps of monetary easing, which is probably more than what most economists were expecting at the start of the year. Personally, I think there will be a minimum of 75 bps more easing before the end of 2016. So those lower rates will offset the earnings disappointments. In terms of real upside for the stock market, we need an investment cycle.