Interview: The reserve bank will raise rates
>> emerging market bonds are hovering near their highest% -prices in at least seven years. for the year, the j.p. morgan emerging markets fund index is up almost 10% and many bond strategists believe prices would continue to rise as russia and brazil continue attracting investors. one who is bullish on emerging markets is raphael kassin, head of emerging market fixed income at abn amro asset management in london and visiting hong kong this week. you’re overseeing about $1.3 billion in the flagship global emerging market bond fund, which has outperformed. what are your comments on greenspan’s testimony and expectations for the pace of interest rate increases this year?
>> we think that the market is expecting a little bit too much more than will probably happen. a lot will depend on the pace of increases in the non-farm payrolls but so far this year, the non-farm payrolls in the states have been disappointing. inflationary pressures don’t seem too high so it’s more likely that the market is surprised with weaker numbers and as a result probably the fed doesn’t hike as much as the market expects which would be good for emerging market bonds, catherine.
>> how good goodwill it be this year?
>> we have a few special events happening of the of course, the special situation with u.s. interest rates is positive. we’ll have the argentina restructuring, which is beginning to prove like it’s going to be a big success and that will be very good for our markets , bringing a lot of good energy. most of the other countries have positive ratings so we expect it will be a good year.
>> what sort of returns can investors expect if it’s higher than last year’s?
>> last year we were able to generate in our fund a return. 14% before fees. this year, we think we’d like to be conservative, we could bring somewhere between 10% and 15%. if all goes well. of course, this is assuming that our view on u.s. interest rates is right and assuming, of course, that no unexpected events take place. so even if we’re wrong, a 10% return is not very bad given the overall environment in equities and elsewhere.
>> to pick up on what you bodies countries receiving upgrades this year, which countries are you expecting those upgrades?
>> well, the first country that will stand out will be argentina which, after a prolonged restructuring process, painful for some, profitable for others who have decided to buy bonds after the restructuring, argentina will be rated single b. it’s been announced already by ratings agencies. that’s a success story. the country has positive economic growth. other countries that stand out are russia. russia, since 1998, has changed quite a lot. it has stimulated a lot in dollar reserves. president putin is doing all the right things, despite criticism, as usual, as everyone is criticized. so russia will likely continue to be upgraded and could surpass mexico. brazil will probably get an upgrade if things continue in the right pace and from then on, it’s you pick, it could be anything the ratings agencies choose but the overall trend is positive. 45% of our index, the j.p. morgan global is investment grade.
>> you have a substantial investment in the philippines. are you still optimistic after moody’s downgraded that country’s credit rating?
>> the philippines is a controversial country when it comes to managing finances but surprisingly, they generally come up with good results, quite volatile. i would not take what the rating agencies have been saying very seriously. they generally tend to lag. they tend to be wrong and i think in the case of the philippines they have overreacted. they’ve done it before. the yields on the long end are around 9% to 9.25%, it’s some of the cheapest bonds out there. given the fundamentals and the political backdrop, the strict in the politics, i would say they probably should reconsider.
>> thank you, raphael, raphael kassin from abn amro asset management in hong kong. hynix semiconductor posted record profit last year on demand from makers of personal computers. bernie lo has more and a preview of the next hour. how well did they do?
>> a record but a miss across most of the metrics as what happened. hynix did post record profits on the whole year for 2004 on demand for continued strong demand for personal computers but net income at 1.7 trillion won was 300 million less than our internal survey was forecasting and operating profits at 1.8 trillion won missed by about 100 million won. any way you slice it, it’s a reversal from 1.7 trillion in losses last time around. what’s interesting, this morning, sales were up 62% to 6 trillion won, exactly what our polls expected. so if the operating profits and net profits were less than expected on sales which came in in line with expectations, you wonder what that means for pricing, pricing power for the company, although the company has been increasing their distribution of chips, the diversity of their offerings and within the industry, you can’t sneeze at that, 30% gains in the chip space just over a two-month period. the stock is recommended as a buy by 10 out of 13 analysts that bloomberg surveyed and we’ll catch up with one of them later in the show.
>> see how investors trade the stock when trading starts in seoul. we may have to live with instant coffee, soon.
>> some of us do because we can’t wait for the mr. coffee to brew. what are you, a fan of instant?
>> anything with caffeine.
>> anything? you don’t seem to be bouncing off the walls. believe it or not, these are not grapes, but coffee beans. coffee prices on the london mercantile exchange rose by the greatest threshold in three months on speculation that a dry spell in vietnam will hurt crops there. you may not associate vietnam with coffee but it is the biggest grower of bones used in instant coffee. soil moisture is below normal for this time of year,
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Listen Interview: The reserve bank will raise rates
nably good and deficits are unsustainable send the dollar higher and bonds lower. we’ll speak with cantor fitzgerald’s chief u.s. economist in a moment. in the headlines, oil shoots above $53 a barrel on signs fuel supplies are tightening. crude finishes at the highest close since setting a record in october, sending u.s. stocks lower. the s&p, dow and nasdaq all fell. the rock band motley crew raining the closing―rang the closing bell. qwest steps up the battle for m.c.i. qwest’s c.e.o. gets m.c.i. to reconsider the $8 billion bid after convincing some shareholders that the rival bid from verizon is inadequate. fed chairman alan greenspan told congress the record budget deficit is unsustainable and spending cuts are needed before costs balloon for social security and other programs. for more, i’m joined by chief u.s. economist at cantor fitzgerald from new york. what were the highlights of greenspan’s testimony?
>> clearly, he delivered very brief assessment of where the economy was, didn’t weigh in at all on monetary policy and spoke about the long-term structural risks to the economy. so that was the main focus. the main focus being the potential bubble brewing beneath the surface in the treasury deficit along with the fuel adding to the current account deficit but chairman greenspan really focused in on fiscal policy today and that was really the main thrust of his discussion.
>> have has comments strengthened the case for further rate increases?
>> from our point of view, we consider chairman greenspan on a path to raise rates to about 4% by year end. that’s been our long-held view since the early part of september. the market has had a rich perspective relative to that and over time, over the last six months, the markets have sort of ratcheted up their views, not quite up to 4% yet. chairman greenspan just noted the fact that the economy is off on a sustainable path, that cap-ex spending is picking up and he noted that business c.e.o. confidence is improving and is much higher but the one thing we want to note is that we’ve raised our own assessment of first-quarter g.d.p. growth to just a little over 4% from about 3.4%, because cap-ex spending is getting off to a solid start this year and there’s lots of other good things going, as well. so we’ll finish the fourth quarter at around 3.9% and ratchet it up to 4% in the first quarter. it’s clear the economy has a good head of steam at this point.
>> given the size of the current account deficit, is the u.s. close to a massive flight of capital from the dollar?
>> this is a big question. chairman greenspan is trying to address this. his view is that so far―we would agree with this assessment―so far, the selloff in the dollar has been fairly orderly and will probably likely continue going forward and i think part of the reason why is because i keep expecting the current account deficit to continue to worsen but at some point over the course of this year, probably towards the second half of this year, we should get some type of stabilization in that deficit as the economies around the globe pick up. so that’s the bet here and i think the markets are taking the slightly more favorable stance on it in supporting the dollar.
>> what about for consumer prices? did greenspan sound any more concerned about inflation this time around?
>> no. chairman greenspan basically didn’t touch the subject of inflation and it’s, i think, really there’s an issue here and i think that the subtle point about inflation is that it’s clearly bottomed, it’s clearly rising and what we have now going on is that unit labor costs are coming very close to matching the rate of growth in core inflation so we look at the u.s. economy as being in an upcycle in labor costs and we expect that over the course of the next couple of years that labor costs will actually be rising faster than core inflation and thereby pulling core inflation higher and we think this is a legitimate concern and underpins our view that chairman greenspan will do more tightening this year than what the market expects.
>> could higher oil prices worsen price pressures and what levels in crude oil prices would stoke the fed to speed up rate increases?
>> so far, chairman greenspan has gone on record as saying that $50 oil, he thinks, is manageable with the economy. and with the efficiencies in the economy. so we tend to agree with that. we think that basically oil prices over the next 2, 2 1/2 years, are headed towards $65 a barrel and we have the view that the u.s. economy and emerging economies, in particular, china, are very much in a global, synchronized recovery here. it’s a reflationary recovery. so we just look for oil prices to continue to grind higher. capacity, more or less, has been stagnant over the last seven years so we just―and capacity takes so long on come on line, we think there will be supply constraints in the face of very solid demand growth so we’re looking for prices to grind higher from here, not threateningly leaping forward, but steadily grinding higher.
>> the potential benefits of moving to an inflation-targeting regime to help guide interest rate policy, which greenspan has opposed, are there any merits at this point to draw up an inflation target?
>> i think the inflation target―the fed has dual responsibilities to achieve full employment, full trend growth and keep in a regime of price stability so for the fed to focus on just one objective is kind of an unusual thing and the economy itself is a very dynamic organism so bakley we just think that targeting just simply inflation misses most of the characteristics of the economy and the linkages between inflation and overall view of the economy are also time sensitive and time dependent and can’t necessarily be pinned down by a simple rule. we would agree with chairman greenspan that to manage monetary policy efficiently in the global economy, really it requires a lot of discretion and it requires a lot of skill.
>> john, we have about half a minute. greenspan’s speech comes two days before the labor department’s report and economists we surveyed say the economy added the most jobs to payrolls.
>> for friday, we’re looking for a payroll gain of 237,000. we expected a number similar to that for january and we’re obviously disappointed in january but we thought the economy is getting off to a sod start and we continue to see lots of signals suggesting a top-down basis, employers are adding jobs.
>> got to leave it there, thank you very much, john. john herrmann of cantor fitzgerald in new york. up next, we’ll talk about bonds and emerging markets .
