‘Yellen’s speech signals a global risk-on’

Global markets drew some comfort from Fed chair Janet Yellen’s dovish speech last week. Market experts interpret Yellen’s comments on inflation, China slowdown and commodities prices as a risk-on signal for markets around the world.

Speaking to Bloomberg TV India, Bank Julius Bear’s head of research for Asia Mark Matthews says emerging markets look good because of the stability in the currencies. He expects the RBI to cuts rates 25 bps and can even go ahead with 50 bps as well.

Even after some reassuring commentary from Fed chair Janet Yellen, markets globally still seem to be a tentative and investors are still a little worried on that global growth picture. How are you viewing things?

Well I am viewing it positively particularly in light of Janet Yellen’s speech on Tuesday, which was unambiguously dovish and a total 180 degree turn from the hawkish commentary that four Fed presidents made in the prior week. So even if the presidents are hawkish, ultimately I think what the chair (Yellen) says is most important. And when you look at the FOMC meeting under Janet Yellen, there are very low dissention rate. There are hawks but not enough of them. And her speech has the amazingly dovish saying that she is happy for the Fed to be behind the current inflation, she is looking at China and commodities prices and no longer beholden to domestic data. It is really a risk-on signal for the markets around the world.

Talking about the markets around the world, what is your view on emerging markets? From India standpoint, fund allocations are increasing. Do you see that happening going forward and how are things looking right now?

Well, this has been an amazing year. And I find all the markets very interesting. But this year really goes down as being among the most interesting because we had draw down in the S&P of about 11 per cent as of the February 11, and investors have taken about $5 billion from global equity funds. But then from that period throughout the remainder February and all of last month, the markets covered so much that the S&P was actually up 1 per cent in the first quarter of the year and investors put about $7.5 billion back into global equity funds, which is even more than they took out in January and in the first half of February.

Now looking forward actually I read an interesting research report. There were 8 other times in the history of the S&P when you saw that happen. When you saw the markets go down more than 10 per cent in the first quarter but then it recovered to end of first quarter and the subsequent performance for the rest of the year was positive in 6 other years. So that provides a nice statistical backdrop and a solid foundation.

And the emerging markets look good because ultimately the reason for the recovery in the market is the stability in the currencies around the world apart from the dollar. The dollar weakness is much behind this. And if the Fed remains very dovish and yet you have got negative rates in the other G7 countries, it does actually make people interested in emerging markets probably more so the emerging bond markets.

Coming to the money flows and economic activity, last year when China started to show signs of slowing down the local investors seem to have just forgotten anything and that the market has anything to do with the economy and just ran off. How close is India from that situation because we finally need a perception to run the market rather than what is really happening in the economy?

Actually, China is not the only place in the world where the economy and the market really do divergent things. In fact, there were an interesting study couple of years ago which showed data for 21 countries around the world going back to the year 1900 for both the stock market and GDP. What they found was there is no correlation between GDP growth and stock market performance.

For example, country with the weakest GDP growth during that period was South Africa and it also had the best stock market growth. So the stock market is doing its own thing in China. The bull market last year was because of a variety of circumstances and probably the biggest thing among them was the fact that prior to the bull run of 2015, the Chinese market had done nothing in the past 5 years. So when it started on a low base, Chinese being momentum driven investors, they just piled in. And a couple of weeks ago when the government took those margin restrictions away, markets refused to come back to base again in China.