Mkt may correct; bullish on equities post Budget: StanChart

After a strong rally at the beginning of the year, analysts by and large expect to see a correction in equities in the short term.  Steve Brice, Chief Investment Strategist at Standard Chartered Bank feels although there is a shift towards volatility, markets may not correct more than 5 percent. Hence, he is advising investors to take a timebound approach to increasing allocation to an overweight position in equities over the next two-three months.

According to Brice, events across the world, including the Italian elections, the debt ceiling talks in the US may stir up the perfect recipe for a risk appetite. He also maintains a neutral rating on the Indian stock market and as far as the emerging markets are concerned, he said, "If you look at our overweight within Asia, we are still overweight effectively North East Asia versus South East Asia. So, we are overweight China, Hong Kong and Korea and we are underweight Indonesia and Malaysia."
Besides, it is going to be critical to see how the Indian government deals with its fiscal challenges during the Budget, added Brice. He believes the equity markets will do well even after the budget as the currency has recovered and inflationary trends have also turned positive. Here is the edited transcript of the interview on CNBC-TV18. Q: Some market watchers have been calling for a correction in the short-term across equities. Do you believe there is one coming?
A: It is always difficult to tell. If you look at some of the indicators like the Volatility Index (VIX) in the United States, it is now levelled now for over five-and-a-half year and that usually is a prelude to some sort of correction coming around the corner. But, the theme we have been talking about is the year of transition and one of the aspects of that is a move towards volatility and equity markets.
We are not convinced about seeing anything significant here. Probably, we do see anything in the 5 percent range rather than something more significant and the key risk for investors is that they are waiting on the sidelines despite the rally we have seen this year. The risk is that they actually missed the rally when it came. So, we are advising clients to take a timebound approach to increasing allocation to an overweight position in equities over the next two-three months. Q: You do not see a problem with the entire liquidity hypothesis being in place for the rest of the year because it has been quite abundant and the fear is that something in the environment like Europe turns the tap off suddenly?
A: There is a lot of potential event risk and that is what we are focusing on for the next two-three months outlook. Obviously, there are Italian elections this weekend, we managed to negotiate the Cyprus election, which not many people were focusing on but, it was something clearly important to get through.
We have got sequester in the States and debt ceiling talks in May as well. So, we have got a lot of things that could potentially take a little bit of froth away from the market but, ultimately we feel these things will be hurdled. We will get through them and ultimately that will be positive for risk appetite. So, the liquidity out there for equity markets is still very rampant. We saw gold breakdown at the end of last week, it broke through a key support and that is the key indicator for us that says risk appetite is increasing as well.
So, it all seems to fit in with the broadening global recovery and receding tail risk that we have seen through last year and which we particularly see through this year. That should continue to support equity markets at least for the next 6 to 12 months. Q: What is the emerging market pecking order right now? Has it changed from 2012 because India was one of the star markets last year? This market after the performance of the first couple of months, do you see any change in strategy from your clients?
A: To be honest, not many people participated in the India equity rally. Most of our clients were much more focused from an international perspective. They were much more focused on what is going on in East Asia and China in particular. That is where we have our overweight.
If you look at our overweight within Asia, we are still overweight effectively North East Asia versus South East Asia. So, we are overweight China, Hong Kong and Korea and we are underweight Indonesia and Malaysia. We are still keeping that thing, we feel that some of the more domestically driven markets such as Indonesia and Malaysia probably are a little overpriced, relative to what we see elsewhere, not looking for negative returns there but we see cheaper valuations in North East Asia.
As far as India is concerned, we are reasonably constructive. We have neutral rating on the Indian stock market at the moment. To be fair, we went overweight last year when it did outperform. We feel it is not necessary to consider it the right place to be changing, but certainly we can see signs of it reducing that neutral to an underweight. If anything, the buzz would be to upgrading it rather downgrading over the next two-three months. Q: How important would India’s Union Budget be in that context for you, especially considering that post March it is usually a tough month for equities?
A: It is going to be very critical to see how the authorities deal with the challenges on the fiscal side. You have got the rating agencies still in the background looking at things and trying to work out what the action is there. So, the reality is that the government probably has been outperforming expectations against what has been asked of them in recent times. Therefore, the Budget continues that trend and we expect equity markets to do well.
We could see the currency recover and therefore, the outlook for interest rates would be a little more positive. We have seen inflation come down significantly already. It is positive and we are watching that trend very closely.