Key resistance for Sensex in near-term is 18000: StanChart

In an interview with CNBC-TV18, Steve Brice of Standard Chartered Bank says that while inflation continues to be a major concern for India, the scope for further monetary policy easing by the Reserve Bank of India is quite limited at the moment. In the backdrop of this difficult environment, he finds 18,000 a key resistance for the Sensex going forward.

Below is an edited transcript of his interview. Watch the accompanying video for more. Q: Some of the trading rally in some asset classes has been on expectations of liquidity infusion. What is your own expectation from the FOMC meeting? Are you expecting some form of a QE3?
A: Operation Twist is quite likely to be extended. We are just a couple of weeks from its expiry. We have to acknowledge the scope for Operation Twist going forward is fairly limited. The US Fed actually does not own that many short-dated treasuries any more so it could be extended for another three to six months but thereafter cannot redeem much.
As we indicated before the key thing here is what is going to come out of the ECB – we see the Chinese central bank easing policy more aggressively, the Fed probably not going to do too much in the short-term. Therefore, we believe a lot of the heavy lifting has to come from the ECB and that is what is going to reduce tail risks out there. If we see them moving to another stimulus to inject into the bond market or into the banking sector, I think that will be much more important from a market perspective in terms of fueling any liquidity driven rally. Q: How do you see global markets for the rest of 2012? Do you look at just intermittent trading rallies because of intermittent good news or is there a sustainable rally here because of sustained central bank action?
A: Our central scenario is still a muddle through scenario. At the moment, we are just emerging from an extreme risk of a panicked market therefore potential for relatively good strong gains over the next two-three months are very significant. But until the underlying issues are addressed, we see a massive stimulus from the ECB.
The risks are that we just come back to the same situation that we have been over the past two or three months where people get increasingly concerned about Greece leaving the single currency and that spreading contagion going to countries such as Spain and Italy. We are certainly not in the blue sky environment for equity markets but given where valuations are, given how depressed people have been over the last two weeks that does not preclude the risk of a short-term, relatively strong rally in the 8% to 10% area. Q: Do you think investors should be willing to take riskier bets on the notion that central bankers are likely to flood the markets with cash or the contagion risk that we are seeing in Spain and Italy are still very high and hence we should stay on the sidelines?
A: What most people are doing is waiting to see the whites of any reflationary efforts eyes before they act. Obviously the G20 summit over the next couple of days is going to be very important to see whether any actions come out of there. Our sense is that people should be adding risk into weakness at the moment either in equity market portfolios or high yield bonds.
We believe there is good value in both of those assets classes and even on our middle through scenario they are likely to outperform other asset classes. Clearly the key area to play that of against would be G3 sovereign debt. We believe G3 sovereign debt is extremely overvalued in the current environment, absent 2008-2009 crisis. We don’t believe that is likely to happen and that is why we like adding risk at these levels. Q: What is your view on the euro? Should one consider adding risk in the currency markets? Do you think there could be some upside in the euro?
A: To be honest, it won’t probably be a level, it would probably be some actions coming out. What we are seeing at the moment is a short covering rally on the euro. We did have a situation where euro shorts were at record highest level, record longs on the dollar as well. So we were set up for a euro bounce and we have been highlighting that as the likely outlook.
I suppose we see Europe solves its mess out without significant ECB action then that would be positive for the euro but we doubt that is likely. So we would be looking for areas to sell the euro rather than at this stage this long into a recovery of the euro, looking for areas to buy, certainly on a multi-month time horizon. Q: How would you approach the Sensex now? The RBI has not moved on interest rates this time around but do you see more easing from the RBI in the course of the year?
A: We see the scope for further easing is quite limited at the moment. Inflation is still a major concern but you do have the growth aspect to it as well. It is a very difficult environment. If you look at the Sensex, 18,000 looks like a key resistance for the Sensex going forward.
From our perspective the challenge is we could see a global equity rally but we doubt that India will actually partake to the full extent of that and part of that is the challenge that the RBI is currently facing of slow growth and high inflation. Until one of those is resolved, equity markets are going to be caught between a rock and a hard place. Q: From an investors point of view what are the next set of developments and news events that you will watch for in Europe with respect to either Greece or other peripheral economies like Spain?
A: Forming a government is going to be very critical. It looks like that is going to be fairly easy now given the vote over the weekend but that still has got to be done. Then we need to see how they are going to approach negotiations with the EU and IMF on any renegotiation of the bailout terms. We would expect the troika to be fairly relaxed and flexible in terms of some sort of renegotiations. I think there is a win for both sides there, so that is the near thing.
Then you have also got the G-20 summit today and tomorrow that is going to be absolutely critical. They have promised a coordinated response - was that just words or are we going to see something material out of them. Then outside of the FOMC, ECB’s next actions are going to be very critical - are they going to start buying bonds, peripheral debt and if they do that in significant quantity, then we can kick this can a long way down the road. At the moment we seem to be kicking it down two to three possibly four months at a time.