Florian Neto, speaking to ET Now, noted the mixed signals from the central bank. “Indeed, we have a bit of diverging views within the FOMC and the communication is not going one way. What was interesting to see is the economic projection from the Fed and they are actually increasing growth, increasing inflation, but decreasing unemployment rate for next year and 27. So, this is quite okayish,” he said.
While Powell stressed that policy is now “less restrictive,” Neto pointed out that the cut appears to be more than just a one-off adjustment. “It may well be the start of an easing cycle. Of course, we need the confirmation that there would not be second round effect on inflation,” he added, highlighting that the Fed’s credibility has been reinforced by tying future moves to evolving inflation data.
On market reaction, Neto struck a cautious but optimistic tone. “The key determinants of the Fed right now is the weak employment data and J Powell was clear saying this is a risk management cut, but at the same time one cannot miss the inflation trajectory. In our view the risk now we have is a divergence between growth and inflation. So, the biggest risk is stagflation, not recession,” he explained.
He underlined that despite weaker jobs data, economic momentum remains resilient. “Yes, labour data is weak but apart from that when you look into hard data, soft data, it held out quite well. GDP growth is above 3%, retail sales came strong. So, for equities a Goldilocks environment. And you may have as well a potential fiscal boost to capex going forward. So, we expect a bit more volatility, but we do think that the party is still on in equity,” Neto said.
Emerging markets also remain on his radar. “We see more upside in non-US asset. We do believe the interest rate differential with the Fed here to cut several times will push the US dollar lower. We remain overweight in equity as our preferred asset class and we do like EM equity,” he noted.On India, Neto acknowledged past headwinds but sees improving conditions. “The first headwind was valuation and the second one was very much negative earning revision. On those two points we have improving news. EPS for India are still double digit and we expect 14% for this year. The GST tax has eventually been enacted and for us it is a very strong move to consumption,” he said, adding that banks remain a crucial sector to watch.Tariffs, meanwhile, remain a lurking concern. “At the end of the day what we have been seeing with our analyst is basically the tariff impact has been largely on sentiment, largely on capex intention, on the guidance from a few companies rather than on the real margin and the real earnings impact so far. Our base case is that we eventually land in a US tariff rate around 18%. So far we have not seen a big impact on growth,” Neto observed.
In terms of allocation, his portfolio stance remains balanced but tilted toward equities. “We are not fighting the momentum on equity and we do believe that the recent environment is very much Goldilocks for equities and especially for non-US equities. We like credit but the risk-reward ratio today is too small compared to equity. We keep some gold as well because the risk on inflation is not negligible,” he said.
As the Fed balances risks of inflation with growth concerns, investors like Neto believe volatility may persist, but equities—particularly in emerging markets like India—remain the asset class of choice.
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