‘What held people away from the emerging markets was currencies’

Weaker-than-expected US job data has strengthened the case for a further delay in the US Fed’s rate hike. Bloomberg TV India caught up with Mark Matthews, Head of Research for Asia at Bank Julius Baer, about the market sentiment and what it means for emerging economies.

Once again the markets seem to be guessing the Fed rate hike is off the table at least this year. What’s your view?

Yes, I think so, because of the numbers. Certainly October is a no because GDP numbers will also come out two days after the Fed meet. It is an important number they want to hold off on interpreting, possibly in December. Of course 13 out of the 17 members of FOMC are still saying that they would like a rate hike in December.

But between now and then interest rates will stay low for sure.

What does it really mean for risk capital?

The picture is confusing. First, the markets do not like low interest rates anymore. I think there was a tipping point sometime earlier this year, where the markets started to get tired of low rates because they were worrisome. Because low rates are possibly a sign that the growth is bad.

Now, the flip side of it is a major thing that has been holding back the emerging markets has been the strength of the dollar. The strength of the dollar is on expectations that the interest rates will go up. So, if the interest rates are not going up and the dollar does not get any stronger then we will be heading into a time where we get a strong emerging market rally because China’s market is stabilised, oil prices looks stabilised, the US treasury is below 2 per cent and the dollar is just going sidewise.

Put it all together, what held people away from the emerging markets in general was currencies. They are down 40 per cent from 2011. People would like to buy in emerging markets but they are held off because they do not want to take a currency loss.

Which markets do you believe will start seeing some bit of interest from foreign investors?

Candidates for that would be places like Indonesia. But also it would be China because that is a very big one — 80 per cent fund managers, probably even 90 per cent, don’t bother looking at Indonesia but everybody bothers looking at China and the values are very clear. I am seeing multiple signs that there would be a pickup in the economic activity of China in the fourth quarter, which the market is not pricing in.