US mkts to see rocky rebound: JPMorgan Funds

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David Kelly, Chief Market Strategist, JPMorgan Funds, said US markets are not out of the woods yet. He foresees a rocky rebound. "The uncertainty has reduced and even economic data is better. We are seeing improvement in the economy. Unemployment is also likely to top out going forward."

Commenting on last week's US bank stress test results, Kelly said the government is trying to ensure that banks are healthy.

He feels financials in the US look good and is positive on healthcare and IT.

Kelly expects the US markets to recover before the rest of the world. However, he was quick to add that in the long run, the rest of the world will grow faster than the US.

Global equities, he added, look cheap from a long-term perspective.

Also see: Economy unlikely to turn around in H2 CY09: Nouriel Roubini  

Here is a verbatim transcript of the exclusive interview with David Kelly on CNBC-TV18. Also see the accompanying video.

Q: A lot of people have noted that what the market is signaling is that probably the economies too are getting out of the woods. Are you inclining to believe that?

A: I don't think we are quite out of the woods. It is gong be a rocky rebound here. We have come a long way, but we would need to go up about 69% to get to the old high on S&P 500. So we are a long way from back to normal here, but it is been a very good few weeks and we have seen diminished uncertainty and better economic numbers.

Q: There is an opinion that more positive economic data is feeding the equity market as well and in that sense sentiment has recovered. How do you read the sentiment picture right now for the market?

A: I don't disagree with the fact that it is a buyers market, I just think that given how much stress we have been through, a lot of things could go wrong and I do think investor's sentiment is fragile here. To me the biggest thing is we are seeing an improvement in the economy. Eventually, unemployment will top out.

When it tops out the interesting thing is we could have this really long period of years with unemployment gradually coming down, we have relatively low inflation because of excess supply in the labour market and we have low inflation, better than average economic growth as we chip away the economic rates. So while everybody's focusing on the current recession, we should focus on the next expansion, which could be a very good one for equities.

Q: What did you make of this stress test business and do you think the markets digested the results that it s no longer a trigger or a big even for the market?

A: I think there is something positive in this whole stress test process, because what it tells us among other things is what the govt. is trying to do is make sure these banks are standalone healthy. There has been a big pull away from the idea of nationalization and government interference, but if you want to make sure the banks are healthy on a standalone basis, you have got to have policies in place which make them profitable.

The more that we move down that road, the more upside there is for financials. I think fin look good, but also sectors like healthcare and technology, a lot of sectors that have been beaten down to  very low valuation ratios which will do much better in a growing economy

Q: What about the rest of the world? How does appetite and the valuation picture look for the rest of the globe?

A: I think the main thing is stocks are a long-term bet. The US will begin to recovery before the rest of the world, but the rest of the world will benefit from that. I think you do want to have a position in international, because in the long run, international stocks are cheap today and in the long run the rest of the world will grow faster than the US.