Nomura says BoJ Decision Riddled With..

Speaking to CNBC-TV18 Mixo Das of Nomura said that he was less excited about the Bank of Japan and US Fed meetings that happened over this week. The US Fed was expected to stay pat and that is what it did, he said. “There is incrementally no news.” He said he found two problems with Bank of Japan’s policy decision. BoJ has committed to overshooting the inflation target. He doesn’t think this is credible. It has instituted a bond yield target at about 0 percent. “Again, I find it to be not useful,” he said, adding that that BoJ is targeting the bond yield at a level higher than current market level. By signalling this, the BoJ is saying too low bond yields can be counterproductive. But according to common wisdom lower rates are good for the economy, he said. “From my perspective, both these meetings were lukewarm, counterproductive over the medium-to-long term.” Over the next three years, he prefers China over India as there are a lot of positive catalysts. But over six months to 10 months, India is a preferred market, given its fundamental growth, he said. Below is the verbatim transcript of Mixo Das’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18. Anuj: What did you make of the Fed commentary and the market reaction and do you think it is logical to expect markets to move towards all time highs now? A: Actually not, if the market seems very excited with the Fed outcome and the Bank of Japan (BoJ) outcome, I am less excited about it. If you look at both of these Central Bank meetings, nothing concrete has changed. So if you look at the Fed, everyone expected them to be on hold and signal for a December hike and that is what has happened. If you look at market pricing for Fed hikes over the course of 2017 and 2018, they were essentially unchanged over the course of yesterday and particularly for 2016 in fact, the probability of a hike in fact went up all the day. So I would see this as very much a near-term bounce which I would look to fed rather than chase at this point. Latha: What Yellen told us yesterday is that they judge that the economy is in fine fettle but still they would wait a bit. So we seem to be getting the best of both worlds that the Fed is giving the economy a clean chit and yet keeping money loose, the BoJ is keeping money loose, aren’t these constituents that should fuel a rally? A: Right but this is very well expected by the markets. Everyone expected the Fed to be hiking on a very gradual path. If you look at the Fed, they have been talking about very low neutral levels of interest rates for some time now. So that has already been baked in by market rally that we have seen so far this year. So there is incrementally no new information over the Federal Reserve meeting yesterday. If you look at the BoJ, there are two things they did. Firstly, they committed to overshooting the inflation target, which honestly I don’t know how credible that is given that they are still well below the inflation target and they haven’t reached it in many years now. The second thing that they did is they have now instituted a bond yield target for the 10-year bond yield at about zero percent and I find this to be not that useful, there are two problems with it. Firstly the fact that BoJ targeting a 10-year bond yield level higher than current market levels kind of implicitly means that they are tapering their purchase programme. So that is not very good for asset markets unless of course the BoJ comes in in the next few meetings by delivering further rate cuts on the short-end then the equation starts to change. The other problem with this I have is that by signalling this, the BoJ is effectively saying that two low bond yields can become counterproductive and this is counter to what we have learned in everyday economics that lower rates are always better for economies. If now the Central Banks start saying that two low rates can be counterproductive that essentially reduces the amount of ammunition they have. So from my perspective, overall I found that both of these meetings were at best lukewarm and over the medium-term to longer-term counterproductive. Sonia: You have recently upgraded China to an overweight, do you prefer China versus the Indian market over the next six months and what could be the arguments for that? A: Over the next three months, I would say yes because there is a lot of momentum in China right now and there is a lot of positive catalyst. I think the most important one is that with the relaxation of total quotas on the stock connect between Shanghai and Hong Kong and the Shenzhen on coming up in December, so there is going to be some positive sentiment towards China in the near-term. So these flows have been coming through very strongly into Hong Kong over the last one month and this can continue for the near future. However, over the next six-twelve months, I would say that India is probably a more preferred market given that fundamentals there just look much cleaner. If you look at the earnings growth that we are expecting in these two markets, India is clearly superior. Anuj: Since you spoke about both BoJ and Fed, what next for the dollar-yen equation because on that will depend a lot of move for the equity markets especially for emerging markets, what is your sense on that? A: I am not an FX expert but our FX team is looking for the dollar-yen to be trading quite flat at this point. They didn’t see very meaningful catalyst out of the BoJ Meeting either. So they think that it is going to be fairly rangebound. That is what we are seeing this morning. Latha: What kind of stocks are you preferring in India? A: Across the region, our focus is very much on both growth and income. So we are looking at very high earnings growth whichever companies can deliver and we are looking also at dividend yields because that offers safety at least in the next six-twelve months when we expect the markets to be quite volatile.

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