I'm a sceptic of Indian government's demonetisation move: Michael Every

Trump policy; US Fed action; Chinese capital outflows are some of the key market risks, he says

The outcome of the US Federal Reserve's meeting and the possibility of Britain triggering off 'Brexit' proceedings at the European Council summit are the two key global events market watchers are eyeing in March. Back home, the outcome of the assembly elections holds key. Hong Kong - based MICHAEL EVERY, head of financial markets research for Asia-Pacific at Rabobank International tells Puneet Wadhwa that he expects the US central bank to hike rates only once this year. Edited excerpts:

A number of experts suggest that the US Federal Reserve (US Fed) could hike rates in March. What's your view?

It is unlikely that the US Fed will hike rates in March. The US Fed talks a lot, but acts too little. The minutes of the Federal Open Market Committee (FOMC) meeting in December revealed how dependent the US Fed's rate outlook has become on the timing and impact of the economic policies of the Trump administration. We currently expect one hike at the end of the year, though that is obviously dependent on what President Trump does ahead.

Do you think the markets are over-fearing the next round of hike by the US central bank?

No, I think markets are irrational in how much they are ignoring it! But they have a habit of doing that longer than one can remain solvent. We seem to be teetering on the edge of another global 'forex war', and that's just a precursor to what may be a massive global trade war as US demand is 'ring-fenced'.

What is your reading of the first few weeks of Donald Trump's presidency? Does it have the potential to disrupt the global financial markets? What about India?

Certainly, depending on what measures he actually introduces. India is unlikely to be entirely immune from such potential actions as a US border-adjustment tax, for example.

So what explains the recent rally in US equities?

Looking at the ongoing surge in equities merely underscores the reality that markets are happily dancing to the tune of a President that will follow up his talk of growth boosting investment and tax cuts with action.

Our view remains that with US debt-to-GDP levels at near record highs, US policy makers will be in no rush to add additional borrowing to the national balance sheet when the economy is gaining traction and doing so without the additional (possible) Trump boost. The investment injection that Trump promises and the market's pre-emptive reaction to this we feel will eventually wane as the President's ability to inject fresh capital investment falls short of prevailing, exuberant expectations.

What is the road ahead for FII flows to the emerging markets in CY17 in this backdrop?

Flows are likely to continue in the short-term. But as I said, that is largely irrational. Negative fundamentals continue to accumulate, and that suggest the opposite will prevail.

What are the key risks for the markets from here on?

Trump policy; US Fed action; US-China tensions; Chinese capital outflows; Eurozone elections. None are specific to India, but none are favourable for it either.

How are the global bond markets likely to play out going ahead given these central bank decisions?

Interest rates and bond yields may rise in the near-term, but the likelihood is the latter at least end 2017 significantly lower than at present.

Can CY17 be the year of debt rather than equity?

There should not be an automatic presumption that there are always returns. Both debt and equities could sell-off markedly if rates rise too fast and too soon, or just debt, or just equities, depending on the global backdrop. Of course, we could return to a 'new normal' trend of both rallying at once despite poor fundamentals - but ultimately that is unsustainable. We can't solve all our problems with more liquidity, much as central banks - and complacent and/or lazy investors - think we can.

How does India appear as an investment destination now?

The outcome of demonetisation remains unclear. I am still sceptical one can remove cash from a highly cash-based economy and not experience enormous disruption, but clearly there are many voices saying the opposite. We shall see in time. India itself looks reasonably attractive given the growth dynamic. As noted, I am a sceptic of the Indian government's demonetisation move - but I am willing to be proved wrong!