Positively biased on equities; buy on declines: StanChart

Over the last couple of days, markets are slightly sluggish and Steve Brice of Standard Chartered Bank feels the rally is pausing due to no concrete action from the European Central Bank (ECB). In an interview with CNBC-TV18, Brice said that he maintains a positive bias on equities and advises buying on declines.

In the absence of any government action soon, Indian markets may correct, added Brice. Besides, he expects crude to find resistance at higher levels, though, weak global data may weigh on crude prices.
Meanwhile, Brice chose China as his top pick amongst emerging markets keeping Korea and Thailand in close second and third positions. Here is the edited transcript of the interview on CNBC-TV18. Q: What do you make of price action and the way volumes have drifted down over the last couple of days? Is the market tiring or just resting before it takes off again?
A: It's really difficult to tell. I think the key things out there at the moment are we still got this promise of reflation. We are still seeing upside surprises to economic data or certainly, the economic surprises indices have bottomed. We are seeing upside surprises to announcements of copper earnings estimates in the US as well.
But, against that you have got Europe still being a major concern. We have had very positive comments from the ECB governor Draghi, but we haven’t seen any action yet. Maybe we are going to see a bit of a pause, maybe we will see bond yields in peripheral Europe start tracking up again giving us a little bit of a dip in the markets.
However, I think the bigger picture is equities are still incredibly undervalued, particularly versus other asset classes. Such weakness is probably going to be a buying opportunity rather than selling now and profit from declines going forward.
_PAGEBREAK_ Q: How would you sum up the current mood in the market? Do you think it can still be described as a risk-on phase?
A: Obviously, as far as when you see markets rally as much as they have done in a relatively short space of time, there is a tendency to talk about risk-on. But, if you take into account the conversations people are having over the dinner table, taxi drivers talking, people are still pretty cautious on the global environment.
People are certainly looking at a lot of the concerns. I think that underlying sentiment is probably the biggest positive for equities going forward. People are very cautious, very worried. They don't see this as sustainable and that's probably going to be a contrarian indicator and suggest equities will still outperform on a 6 or 12 months time horizon. Q: How are you mapping flows at this point? August has been a very good month for India despite poor negative macro news. You still got a billion dollars in the first week of August. Do you see such robust flows continuing?
A: It really depends on what happens with the policy action that needs to be taken by the government on the fiscal side, either short-term measures such as reducing fuel subsidies or plotting out a long-term fiscal policy. We are obviously having very positive words coming out from the government that they are planning this. It is work in progress.
If that takes longer than what markets are hoping for, we could see equity markets back off. I think for the Nifty, the 5400 we reached last week is probably a short-term top. We may come down. Overall, we are in a bottoming out phase here.
Valuations are still very, very low versus history whether you are looking at price-to-book, dividend yields or price-to-earnings ratios. They all seem to be one standard deviation below the norm and that suggests, ultimately as we have go those reassurances on the policy front the Indian stock market will start to do a lot better. Q: The thing which worries Indian investors is the way crude has moved back to USD 114 on Brent again. Do you see more momentum in that market?
A: I suppose it is consistent with maybe a temporary pause here. We do believe that we have around key resistance levels now for Brent crude. As we said, some of the data has actually improved in the States, but we did have very disappointing data out on Friday and indeed all of last week out of China.
Maybe we should see little bit of a pause in the short-term, but again we are still overweight oil in our asset allocation model from a tactical perspective. We would expect those dips to be an opportunity to increase exposure and look for higher levels ultimately.
_PAGEBREAK_ Q: What are your favorite emerging markets in Asia right now? In what kind of pecking order, given that China too has been underperforming as a market?
A: We still like China particularly outside of the financials. The banks in particular have taken a hit on lower interest rates and the corresponding reduction in net interest margins. But, given that we are expecting another interest rate cut in the third quarter. That still might have some time to play out.
Outside that we believe the reflationary effects that we are going to see, have seen and are likely to see going forward should support the market. So China would be up there as one of our top picks. We still like Korea, particularly the tech sector there. Valuations again are not stretched at all and recently, we added Thailand as a market we like.
We believe the government policies are going to be supportive of the economic environment and again valuations are not stretched and we are seeing some good overall momentum in that market as well. Those are our three favourite markets in Asia. For the less risk averse investors, Russia still remains a potential play as well on the oil theme.