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May 22, 2013, 01.42 PM IST | Source: CNBC-TV18

S&P likely to see 1700: Eastspring's Nicholas Ferres

US stocks rose on Tuesday, with the Dow and the S&P 500 closing at new all-time highs as Federal Reserve officials' comments eased some concerns that the central bank could start reducing its stimulus programme.

Nicholas Ferres, investment director (global asset allocation) of Eastspring Investments is surprised by the record rally in the S&P 500.

US stocks rose on Tuesday, with the Dow and the S&P 500 closing at new all-time highs as Federal Reserve officials' comments eased some concerns that the central bank could start reducing its stimulus programme.

Also read: Wall Street ends flat on correction worries

Stocks extended gains in afternoon trade after New York Fed President William Dudley said he cannot be sure whether policymakers will next reduce or increase the amount of purchases, due to the "uncertain" economic outlook.

Earlier, James Bullard, president of the Federal Reserve Bank of St. Louis, had urged the European Central Bank to consider employing a US-style quantitative easing programme to counter slowing inflation and recession in the euro zone.

According to Ferres, the S&P trending to 1700 is "quite likely" in the near-term.

Commenting on the emerging markets, Ferres says the region is witnessing reasonable corrections right now. "The divergence in emerging markets continues to be significant," he told CNBC-TV18. However, he feels Brazil, China and Russia offer cheaper valuations than India.

"The volatility in Japanese markets remains extreme for now," he says.

Below is the edited transcript of his interview on CNBC-TV18

Q: A quick word on the observations that came through from the Bank of Japan (BOJ) and whether that source of liquidity remains intact for global markets?

A: It probably is in the short-term. For me, the more interesting aspect of what is going on in Japanese markets is really the volatility in the Japanese rates. Not just that these rates have moved higher, but that the volatility has been quite extreme and that suggests that investors are probably too sanguine about the ability of central banks generally to softly control or calmly move both output and inflation back to more normalized levels. So that material risk for risk assets and any particular carry trades down the track.

Q: So far any predictions of correction this summer have not come through beyond a couple of days. Do you think that has lulled people into a sense of complacency? Do you see the next few weeks being as benign in terms of the momentum carrying prices higher in equities?

A: It has certainly surprised me a little bit. We have been wrong on the broad S&P 500 index, but I do think that we did see fairly reasonable corrections in some of the emerging markets which I have mentioned on your program before, certainly from around January. So there were selective risk assets which saw reasonable corrections and we did use those as an opportunity to add risk in some of those areas.

For example, we have increased our overweight position to Italian and Spanish equities. We have also recently rotated out of the expensive market of Pacific which includes Australia, Hong Kong and Singapore into more emerging markets in Europe. So we have taken the opportunity in some of the underperforming and cyclical sectors to add some risk. I am a little bit surprised that the S&P 500 has not seen some sort of consolidation so far.

Q: What lies ahead during the course of the summer? Do you see this tide of liquidity continue to lift most boats albeit with some differential in performance or are you seeing a big risk-off event ahead of you?

A: The differential is important and perhaps this recent rotational bid fairly modest so far into some of the cyclical sectors which had been underperforming may give you the final leg up in equity market and may push the S&P 500 to 1700. But the defensive sectors are particularly vulnerable and if growth conditions start to normalize then that implies that the Fed not to be continuing its QE program and perhaps even thinking about raising rates. The carry trades and the yield oriented stocks and products will be particularly vulnerable in that sort of situation.

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