The global market will be keenly watching the Federal Reserve's action today. More and more analysts are expecting a quantitative easing (QE3).
In an interview to CNBC-TV18, Sakthi Siva, managing director of Credit Suisse says there is likely to be a continuation of the rally. "We are not suggesting investors to chase. We are suggesting investors to continue to buy the dips," she adds.
Below is the edited transcript of her interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy.
Q: Can some form of QE spark off a major global rally or a continuation of the rally that we have had or do you think it is more or less in the price?
A: We think there is likely to be a continuation of the rally. There is always a tendency to buy the rumor and sell the fact. The markets have rallied by around 10% from the lows in June.
If we do look at valuations for emerging markets, we are still trading at about 1.6 times book, below the 1.7 times book that we saw at the start of the last three Fed easing—QE1, QE2 and operation twist. So, yes, we have had a 10% rally, but we would argue that rally has been from rather depressed valuations.
Our theme all of this year has been don’t fight the central banks. We could actually see a continuation of this rally. But we are not suggesting investors to chase. We are suggesting investors to continue to buy the dips.
Q: In India, what is the kind of feedback that you are getting from clients? Has a time come to become aggressive and plough in some money into cyclicals or do you think defensives are still the way to go?
A: If you look at India, it has actually received quite a lot of foreign inflows this year. Infact I think it has got quite a lot of inflows this year. But I still find investors rather sceptical on buying the cyclicals. Even our own India strategist still prefers some of the consumer staple stocks that are seeing earnings upgrade.
I tend to be driven more by that valuations. I have been suggesting a push into some of the cheaper cyclicals like Tata Motors. But it is certainly not well accepted by the clients. I think the clients are still rather nervous in terms of the outlook. So, they are still, in my view, crowded into a lot of the defensive names.
Q: We have had three good months globally on the trot with some small pullbacks in between. How much of an extension do you see from here of the global equity rally fueled by liquidity? Do you see many triggers for it going forward?
A: The rather disappointing part of this year has been the fact that both global emerging markets and Asia have actually underperformed the world. If you look at the S&P 500, the S&P 500 is not far from its 2007 highs. If you look at MXASJ (MSCI Asia excluding Japan), we are still a good 20-30% below.
We have just published a report saying if you look at Asia, the discount versus global equities is now 15%, actually the biggest in about two years. So, over the next few months, we might actually see some scope for Asia and emerging markets maybe to catch up with the world performance.
We are expecting a continuation of the world rally, but more outperformance coming from EMs. Last time, I had highlighted that our view is that global IP momentum appears to be bottoming. We feel that if you look at the recent numbers out of US or Europe, it does support that call. If we are right on that then traditionally EMs would start to outperform.
Q: When you say outperform, what kind of an upside are you expecting to see? Do you think it could restrict itself to a 5-10% growth from here or would it be more than that?
A: We are looking for a 10% to slightly higher upside. Our year end target for MXASJ (MSCI Asia ex. Japan) is about 560. At the moment, we are sitting at 500. So, it gives us roughly 12% upside.
We have only got three-four months left. So, it is a little bit concentrated, but it is based on a couple of themes. We do believe global IP momentum is starting to bottom. That is the reason for favoring some select cheap cyclicals. But, more importantly, our main theme continues to be don’t fight the central banks, whether it is Europe, with Draghi or with the Fed.
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