Global markets overbought; ready for pullback: Finaport

In this pullback, he sees 1,340 level as the support for S&P 500.

He goes on to say that Indian equities could also see a pullback. “There is so much bad news out there, but we think that a lot of this is already discounted. So we could actually see some slight outperformance by India versus the rest of Asia,” he explained.

Below is an edited transcript of his interview. Also watch the accompanying video.

Q: We have seen this risk appetite on for the better part of 2012 so far, but is the best over? Are we going to see some money being taken off from the emerging markets?

A: In the near-term, yes. I would think that at the moment it’s risk off, but of course we fluctuate between risk on and risk off almost on a weekly basis. But it looks like at the moment at least the markets are ready for a pullback that could last anywhere between four and six weeks, because we are actually a bit overbought everywhere.

Q: If there is a pullback, what’s the kind of correction that we might see in the developed market equities and even in the emerging markets?

A: We are looking at the 1,340 level on S&P 500 as a support there. If that doesn’t hold of course that would be a bit of a problem, but I would be looking for something on that order. I would say about 1,340 on the S&P and for emerging markets I will think a similar pullback.

Q: Where would you stand on India from now to maybe the next quarter or so? Would India underperform the emerging markets basket?

A: I don’t think so. India has the advantage that the easing cycle has not started yet, that’s still yet to come. Of course there are a lot of issues, but you know that the bull market climbs the wall of worry. We are talking about deficits which are high and of course the Budget tries to limit that, but that depends on a lot of other things.

Among others the oil price, how fuel subsidies could pan out and of course what inflation is going to be like. If inflation really goes down to 6% as we expect by April and after we will probably see a rate cut by the Central Bank. So in that case India should actually do quite well because as I said the rate cutting cycle is still ahead of us.

Q: So far we have seen FIIs continuously pumping money into the Indian cash market. How do you expect the money is going to behave with respect to India going forward?

A: Again it’s a question of risk on and risk off. With risk on of course all emerging markets would benefit and of course the risk off environment is a bit different as we all know.

For now there could be a bit of a pullback, but again we like the story in India. There is so much bad news out there, but we think that a lot of this is already discounted. So we could actually see some slight outperformance by India versus the rest of Asia.

Q: If it is risk on what would the top three assets be for you? Would it be developed market equities first and would commodities be anywhere in that basket?

A: We had this pullback in US treasuries and in bonds in general because the idea was that US economy was recovering. We were very skeptical about that, we think the recovery was driven by some one-off factors like the weather for instance. So I think going forward we could see some slower growth. So we think there is a buying opportunity at least short-term in US treasuries and corporate bonds, high yield corporate bonds especially because the easy demand for income and the bonds probably should do better for the next few weeks.

Having said that, we are not writing off equities by any means because if the economy slows we are going to have the central banks coming in with a QE and that is supportive of equities. So we think at the moment is probably more developed markets rather than emerging, but if we have more QE emerging markets will probably outperform.