Sorry to burst the bubble but mkts will head sideways: HSBC

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

On the sidelines of the HSBC India Conference, the top global team of HSBC Investments - Gary Evans, global head of strategy and Harold Van Der Linde, managing director of Global Research, Asia Pacific talk to CNBC-TV18's managing editor Udayan Mukherjee.

Evans credits the stellar January run in global markets to two factors. The first is that fund managers come back at the beginning of the year and the second is the European Central Bank (ECB) putting flooding the market with liquidity which helped.

Over the course of 2012, there will be periodic jitters and periodic upswings, says Evans. His overall view of global market performance is a sort of binary outcome. "Ultimately we see the share markets globally being pretty much sideways and not being in any sort of uptrend."

Below is an edited transcript of their interview. Watch the accompanying video for more.

Q: How have you read this spectacular January rally? Do you think it has legs as we get deeper into the quarter?

Evans: Quite often in January you get this effect as fund managers come back at the beginning of the year. We had a bad year last year. They say - now let's look on the bright side, a little bit of a sunny outlook for the year, a bit of money flows in and quite often that effect runs out. So we are still fairly cautious for this year.

One big issue I am sure we will talk about in more detail is the European Central Bank (ECB) which has been putting in a lot of money into the market and that liquidity has helped a lot. So a combination of that January effects plus what is essentially quantitative easing (QE) by the ECB, is the best way to explain what was a very strong January for global markets.

Q: What convinces you that this kind of liquidity from the ECB will begin to fade because that has really been the pillar on which global markets have risen in January?

Evans: I don't think it will necessarily fade. If you look at the size of the ECB's balance sheet and that's a thing to look at, it is growing about 45% over the last six months. In December alone, 350 billion euro increased in the balance sheet. The key thing to look out for will be the next round of the Long Term Refinancing Operation (LTRO) and that happens on the February 28 and 29. Now the market is starting to rumor that it may be as big as 1 trillion euro. So more than double the size of the first one on December 22.

That therefore is somewhat priced in but that's a very large amount of money and that money is clearly too some extent flowing into government bond markets for example. I think people are focused on that a lot but they have missed the fact that we do still have some questions over Greece, what happens to the Private Sector Involvement (PSI) there, will the stability treaty really be signed off by all the governments and what happens to the size of the EFSF - the body that is there as a cushion to help governments that get into trouble in Europe.

A lot of questions are still left. From time to time over the next few months, those questions are going to come to the forefront again and cause markets to have periodic jitters. Our overall view for this year is we have a sort of binary outcome. There are going to be periods like January where we have very strong rallies, things look like they are getting better but I do think people are perhaps at the moment forgetting that there will be some negative periods as well where some of those risks come back home to roost. So ultimately we see the share markets globally being pretty much sideways and not being in any sort of uptrend.

Q: Emerging markets (EM's) have sucked in quite a bit of money. In India we have got about USD 2.25 billion in January. Do you think it's just that people were underinvested in some of these markets and did the new liquidity there seeking returns in these asset classes or is something else going on in the EM universe?

Linde: There are two things going on. First of all EM's to a certain extent are a better play to what happens in the rest of the world. So we have seen a lot of outflows late last year and basically the reverse at the beginning of this year. But there are certain markets and that we have been looking at which were heavily underinvested. I would say for example Taiwan for example is a marker where people were more underweight than they traditionally are and we have seen lot of money returning in that market.

In India, may be the situation is slightly different. India is more dependent on foreign capital flows. It has to deal with the current account deficit situation and it is more reliant on foreign flows. This is probably one of the reasons why India has performed so strongly as well when the money returns in the beginning of this year. I am not a specialist on this but I believe some other markets with similar characteristics like Turkey have seen a similar kind of inflow entering their equity markets.

Q: Are you reading this as a relief rally or a dead cat bounce or do you think fundamentals could be turning around something which the liquidity and stock prices might be beginning to price in today?

Linde: If you look at Asia for example in general, there were reasons to be optimistic. For example, valuations are still relatively lower across the region. We see fiscal expansion, we see across the region central banks lowering interest rates - that's already happening in some countries. For example in China, they started lower reserve requirements. So a lot of tools have been put in place for Asia at least to adjust to slower growth. Maybe later on in 2012, we are going to see some better growth numbers coming through. So that sets Asia maybe a little bit better in terms of equity market performance than globally.

But it comes back to the fact that globally there are certain issues which still need to be resolved. What we have seen in the beginning of this year is a strong rally in a lot of markets, which could be reversed if suddenly Greece comes back to the forefront or the financing of Italian bonds, etc topics which the market focuses on may see us going a little bit back again. We see global markets going sideways.

In Asia, we are a little bit more optimistic. Maybe we see something like high single digit or around 10% overall performance for Asian equity markets in 2010. That means we do a little bit better than globally, but not a hell of a lot but more volatility.

Evans: From a global point of view, one thing we need to consider is what type of economic growth are we going to see this year? Our economists at HSBC are really quite cautious about that. For example in the US, they see only about 1.5% real GDP growth and the consensus now is it is probably close to 2.5%. Part of the problem for the US we see is that you have got very little, if even no wage growth. How do you get consumption growth when there is no wage growth?

The answer is last year it just came about through a decline in the savings rate. So real personal household disposable income actually fell last year but consumption grew by 2.2%. Savings rate went down to 3.5%, now it can't keep on going down - that's not sustainable. So, that's the main reason we see US economic growth being quite disappointing. If you look at Europe, even leaving aside some of the problems with sovereign debt, we have austerity plans everywhere. The way that we are trying to get out of the sovereign debt issues in Europe is by squeezing the budgets by having fiscal contraction.

So we see a recession in Europe this year with GDP falling by as much as 1% for the eurozone and maybe as much as 3% for the most vulnerable countries like Spain and Italy. So in that sort of environment, it is quite hard to see equity markets making that much progress. Now the emerging markets look better. We see China continue to grow at about 8.5%, India, on a calendar year basis we have got 7% and Brazil close to 4%. So growth we see holding up much better in the emerging market world than in the developed world.

Q: At what point do you think that equity markets across the world would start to focus on tepid anemic growth that you are suggesting for CY2012 and move away from tracking liquidity which is flowing in abundance?

Evans: It's going to be patchy frankly and getting an exact timing of this is difficult. One of the things worth remembering though is that we did have some quite strong data in the fourth quarter particularly coming out in the US and our view is that is going to fade quite quickly and there were some special factors. One is that last year you had a big tax break for capex in the US. So companies could right off all of that capital expenditure in the first year and that tax break expired at the end of December.

So a lot of capex was brought forward to the end of last year at the expense of this year. There are also rather technical questions about how the seasonal adjustment is done. If you remember the fourth quarter of 2008, the global economy fell off a cliff. So when you are adjusting that fourth quarter for the seasonal variation you are actually probably adjusting it too much.

So we think the first quarter GDP growth in the US is going to be quite weak. People because of this liquidity issue have taken their eye off the bowl on earnings. But actually the fourth quarter earnings in the US has being one of the weakest for probably two-and-half years and only about 60% of companies have beaten expectations. That doesn't sound too bad but typically it's running at 80-85%. So it wouldn't be surprising over the next month or two to see earnings and growth expectations being revised down a little bit.

Q: Where do you put India in that pile because it was one of the worst performing markets of 2011? We have started on a note of outperformance in 2012. Do you think it could turn out to be a good year or it's just a reversal trade that we are in the midst of and you don't have very high expectations from this market this year as well?

Linde: One of the reasons why we are in Mumbai right now is HSBC has got this Champions of Growth conference going on to reassess India to a certain extent. But the way we have looked at India is that we become a little more optimistic on India. We have moved from an underweight position to neutral position.

India looks cheap on a historical basis but if you compare it with the rest of the world and the rest of Asia in particular, it is still not as cheap as for example - China or Taiwan. So I think valuations are not supportive yet for India to rally further. There are a couple of other issues as well. Earnings expectations which are still running around 16% EPS growth for 2012 in India are too high and we already see analysts starting to cut their numbers. So that's another risk to the market which might come and haunt us a little bit back.