Sensex may test 12K before buying emerges: HSBC

Michael Preiss of HSBC says that Institutional investors are using rallies to sell in emerging markets.

He adds that markets have one more leg of weakness and that Sensex could test 12,000 levels before buying emerges.

He further adds that Central Banks worldwide are in a dilemma over US Fed rate cuts.

Excerpts from CNBC-TV18's exclusive interview with Michael Preiss:

Q: What have you made with the kind of pull back equity markets have made after retesting their January lows and what do you expect to see over the next few weeks?

A: Most probably we are going to see renewed weakness in the markets with them again testing new lows. But what is very interesting is that our friends in United States are trying everything in their tool box to basically make sure that the slowdown which we are seeing is basically slowdown because fundamentally there are a lot of problems in the financial system and in the global economy which should not be underestimated. The key message is that everybody now agrees that we are in recession and the only real question now is that how long and how deep.

Q: What do you think will tip markets back again into a spate of weakness and do you think it’s going to be another set of disappointing data or cues from the US or do you think there is some kind of fund flow situation or out flow situation for emerging markets?

A: I think both and what is very interesting is that whenever we see the intra-day action in the markets, the market uses it. This was the biggest move in 5 years for the US stock market too. But in Asia at least and also now Europe people sell into this and they don’t buy if they know there is buying coming into the market.

The dollar to some extent shows us that the market on average doesn’t fear that the Federal Reserve rescue package might not work, so people are the net sellers of the dollar.

So technically market action will tell you that everybody is not convinced that this is working. So more and more people instead of being net buyers use these higher levels to off load more stocks and keep more cash waiting because lot of people including the intuitions are asset rich but cash poor and in this environment cash is king.
 
Q: Given that situation at this point in time, how are funds allocating their portfolios, the money at hand across asset classes given the weakness in the equity markets?

A: That is a bit of a problem because a lot of these fund managers, specially the only long-only players have to invest even though they might think that perhaps there is more downside. So that to some extent is stabilizing the markets in short-term.

Net-net I think the market really waits for more capitulation. I think we have another leg down and then most probably we will see net-net buying coming in but not for the time being. For the time being most probably we could expect more downside because the risk reward ratio still somehow points to downside.

Q: Do you not see money being taken out from commodities in the near-term and being pushed into equity markets particularly in the emerging market pack?

A: That is true, we could see a risk/re-sell in the commodities but I think the real issue from an economist’s point of view is the so called stagflation scenario where we have low growth at least from industrialized world. Let us take emerging market aside but still higher inflation and that of course is the real dilemma especially if the Fed cuts 50 bps or 75 bps on the March 18 or 100 bps then to some extent our friends in the US are exporting their problem around the world.

That I suppose is the real headache for the people like the RBI or other Central Banks in Asia in particular who have a real dilemma now. Since America's lowering rates aggressively seems like they are exporting their problems of subprime to the rest of the global economy. How do we otherwise explain oil at USD 108-109/bbl and I think that is the real problem and that is why potentially we could see more downside to equity markets.

Q: What do you think will the quantum of weakness be, back to the January lows or 5% lower than that or even more?

A: Most probably with regard to your market, the Sensex potentially could even see 12,000 before a really long-term net buying coming in because at the moment I think more and more people would agree that it is the trader’s market and not an investor’s market.

For the last couple of falls we saw buying on dips was the right strategy now I suppose it is in everybody’s interest and we are telling this to clients across the board to be defensive in their portfolio.

If you buy stocks, buy stocks of good quality and high dividend yield and stay away from the short-term fluctuations and try to pick a bottom because the bottom potentially is much lower than what we think it could be.