See 10-20% rally in markets from current levels: RBS

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Q: How likely is it that developed markets like the US start outperforming emerging markets in the near-term, is it possible?

A: No, I think emerging markets will outperform developed markets in the near-term. We remain overweight Asia, compared to the rest of the world. With the dollar breaking out last night, to a new low, it is a strong indication that the risk trade is still on and in that environment emerging markets rightly or wrongly trade to the higher beta. On that basis, we actually think there is going to be excess returns still to be had in the asset class. This might change as we go into the Q2 of next year but for the time being emerging markets should do better than developed market equity classes.

Q: Your three overweight sectors, technology, telecom and industrials - within that space or subset would you picking anything you like in India?

A: Yes, we are approaching the market with a view to not just optimize our upside but also to take care of any potential downside that might come. What is interesting about these three sectors is that until this year for all of them, the preceding long period of time had been one of difficult operating environment, one of difficult relative performance and as a consequence they are under owned by investors.

They are also cheap in their valuations and obviously both technology as well as industrials has got a high degree of leverage into a growing world. So if you like cyclical exposure, if you like operating leverage, you get a lot of that in industrials and technology.

For technology in particular, the thing that is happening is that the long-term growth of earnings is going to be reassessed by investors. We have had a decent rebound in earnings this year but I suspect it will be a multi year story whereby companies that in general won't invest too much will be increasing their investment on technology because they haven't invested in this particular segment for long period of time.

The average age of computers in companies is now getting quite old; they also got an upgrade in operating systems which will further that trend. So although people might think technology has done well on a short-term basis, if you take a longer view 5-10 years, you would find that it's been doing very badly and I suspect it will out perform for quite a while.

Industrials is more like a broad mid-cycle exposure. Whereas telecom has been out of favour now for quite some time and it is seen as a defensive sector but we think there is quite a lot of value here. They pay you good dividend yields, they are cheapest in the region compared to global peers of any sector and I think there is a catalyst coming from mergers and acquisition (M&A) as we go into 2010.

Now unfortunately and it's somewhat symptomatic of the Indian stock market at the moment -- there is little value in any of these three sectors. Of course, the Indian IT space is somewhat different from that of rest of Asia, it is much more currency sensitive and equally of course its key clients are all dealing with major changes in the business environment in particular the financial sector. Meanwhile the valuations are extremely high -- most of these stocks are back at new highs.

So I am afraid not -- there isn't too much value in any of these sectors that we like. But there is some value emerging in the telecom space in India but here the competition and operating environment remain somewhat challenging. I think it's a bit too early to step up.