Indian equities at higher end of trading band: StanChart

Although declining inflation has brought in some relief, Steve Brice, chief investment strategist at Standard Chartered says the recent pick up in oil price will add to current account deficit worries. He continues to find better valuations in China and Korea but says India is being watched closely. “Political flexibility is much better in China than what the scenario is in India,” says Brice.

He sees Nifty in the 4,700-5,300 range. Cautioning investors looking at India, he says Indian equities remain at the higher end of the trading band. For now, he doesn’t see the Reserve Bank of India changing its stance on having any rate cuts at its credit policy meet on July 31.
For the US, Brice believes that the labor market data will be critical to the Fed in deciding on quantitative easing. The need to recapitalise banks, ring fence sovereign markets and announcement of more pro- reform policies continue to remain the three most critical requirements for the EU. Below is an edited transcript of his interview to CNBC-TV18. Q: What’s the approach for equities for the second half of this month? Is it looking like a dull performance or are you guys preparing for a big move?
A: Clearly the short-term risks are still fairly fragile from an equity market perspective. What we have been seeing this year has been very reminiscent of what we saw last year. Economic surprises particularly in the US have been disappointing. Data coming out are on the weaker side. If you look at the stock market performance, it’s very similar to what we saw in the beginning of last year.
We are heading into the quiet summer months and to be honest we are all hoping that they are going to be quiet because we still got the challenges in Europe that have yet to be resolved. We have seen some significant progress there. But there is that risk that we could see a little bit of a drop further from where we are now before we see a strong rally towards the end of the year. That’s really our outlook. Q: What’s the market more focused on? The weakening of the economies which is fundamentally bad or the hope that all of this will lead to more quantitative easing or stimuli which then can spark off rallies?
A: I suppose it depends which day you are talking about. At the moment if anything the focus seems to be more on the former. So the deterioration we are seeing in growth profile, in terms of the US that’s been coming through pretty much on a daily basis. We did have industrial production bounce back yesterday, but overall the picture still looks fairly weak in the short-term.
But a lot of people now are focused on China. We are talking about a U-shaped recovery there. Clearly the data is quite concerning. The authorities seem to be more concerned about it. At some point that will lead to an accelerated response from policymakers. Bernanke hinted at it last night. We are still some way from the data pointing towards that.
The People’s Bank of China (PBoC) is expected to ease further, but first what’s key is what happens in Europe. The European Central Bank really has been very quiet in recent times. Spanish yields still kicking up around the 7% mark for the 10-year yield. That’s probably the key worry to focus on. If we get up towards 7-7.5% then we would expect to see a significant stimulus from the ECB.
_PAGEBREAK_ Q: Crude has also bounced back over the last few days. What do you think is behind it? Do you see more upside in the near-term?
A: Several things. Obviously we saw the rise in inventories has been majorly causing the decline. We have seen those reverse somewhat. We saw speculative positioning oil looking very weak. All of these factors have come back and now supported the oil in a very significant way. We have also seen the geopolitical situation in the Middle East after a fairly quiet period starting to see signs that that might not be as calm as historically.
To be fair we are probably getting back. Brent is around USD 103 per barrel. We reckon we can get up to USD 108-110 per barrel in the fairly near-term. To go further beyond there in the short-term is probably going to be challenging. Probably a little bit of consolidation after a very strong rise over the past couple of weeks. Q: Going through the Merrill Lynch Fund Survey details especially for the BRIC nations, while there is money coming in most of it seems to be a reallocation between China and Russia at this point. How high is interest in India? What do you hear about flows?
A: From our perspective, we are still very worried about flows in terms of going into emerging markets. What’s going on in Europe is still likely to sort of be a contracting effect in terms of flows being reallocated to emerging markets. What flows we are expecting to come out are often going to be allocated increasing to local currency bond markets rather than local currency equities. Until we see China really opening the floodgates in terms of further monetary and fiscal stimulus.
As far as India is concerned not lot is really changed. We are talking about we had been in a downtrend for well over a year, maybe even 18-24 months now. Yes we have seen a short-term bounce in recent times partially probably on lower oil prices obviously bringing inflation down. So some sort of hopes coming through that that might lead to greater response from the RBI.
We believe we are some months away from that. So for us the Nifty is likely to be in sort of 4,753 range, trading towards the top end of that range at the moment. In the short-term we would be a bit cautious obliviously looking for policy action from the RBI and from the government as the key facilitator of pushing the market higher ultimately. Q: There is a lot of talk now about the fiscal cliff, the perfect storm, things really coming to a head in terms of economic data being poor just at the start of 2013. What kind of approach are people taking to markets for the end of the year?
A: For us the economic data we do expect to turnaround gradually in the third quarter and into the fourth quarter, but obviously we do have this massive uncertainty around the fiscal cliff and Bernanke was highlighting concerns that it’s better to deal with it now rather than try and deal with it after the elections in November. We also know that politically that’s highly an unlikely outcome. So we are going to wait till November.
We are going to have key uncertainty going into beginning of 2013. We do believe it will be managed. Obviously that uncertainty will mean that we won’t get a very strong growth out of the States. So we are still looking for 2% growth in the second half of the year and into 2013 as well even given that fiscal contraction.
If we knew what the outcome was today we would probably be able to manage with it. The Fed could obviously calibrate its policy accordingly, but the problem is markets hate uncertainty and that’s clearly going to be a concern. Q: How are global investors looking at India relative to some of its large BRIC peers, Brazil, Russia and China at this point?
A: From our perspective, we are overweight China and Russia, we are neutral on India and that’s largely still a valuation case. We do believe the policy flexibility in China is a lot greater than it is in India as well. We are really talking about what do the Chinese authorities want growth to be and if its sub-7% then that would be concerning but if it’s above 7.5-8% then clearly that would be reassuring.
We are assuming that given recent comments that it’s more likely to be in the latter camp whereas India is almost being tugged side to side by different factors, a lot of them global in nature, some of them domestic. We really need to see some of those resolved. It feels like it’s almost a rudderless ship at the moment which may sound harsh but at some point we need to see some policy actions taking place, inflation come off and then India will look a lot more positive very quickly. At the moment there is no real clarity on how that’s going to be achieved.