European markets may correct in next few weeks: SocGen

Patrick Legland, global head research, Societe Generale, says that there was a good rebound in most European emerging markets but we might see some corrections in next few weeks. Investors are still too much underweighted in European assets and then a switch from emerging market to European assets is likely.

Below is the edited transcript of his interview to CNBC-TV18. Q: How do you look at the developments in Italy, will it balloon into something ugly?
A: Not really, but we are clearly seeing an area of concern. Italy has the highest level of debt in Europe. Italy ranks third after Greece and Portugal in terms of percentage of debt as a percentage of total GDP and it is obvious that the market would be worried. Markets do not like political uncertainties. There is uncertainty with German election next September. Investors are waiting to have better visibility on the outcome of the Italian election.   Q: Debt buy back is currently going on in Greece and according to the reports they have received a bid of around 26-28 billion. Will it be extended today? What's the outlook if the bids are lower than 30-35 billion being targeted?
 
A: Greece is willing to reduce its average cost of debt and it seems to be moving relatively well and it will not be seen as a major concern by the market. The market will focus on uncertainties from Italy. Growth is another part of the story. In last few months in Europe we saw all Purchasing Managers' Index (PMI) indicators slowing down. There is a clear need to restart the economy in Europe. Q: On Friday, despite negative news flow the European markets did hold up well, for example DAX - despite bad economic data it managed to end in the green. Was it because there were noises that the ECB could cut rates in 2013, or the council would cut rates, but they did not do that because they were afraid that could send a negative signal at a time when they were cutting growth forecast. Do you think it is supporting the markets right now?
A: Correct. The prospect of ECB cutting rate is positive not only for the economy, but also for the euro. Euro is far too high right now. Our fair value for the euro is around 1.05-1.10 based on Purchasing Power Parity. A cut in European interest rates would be positive for the euro. The global investors are still massively underweighted in European risky assets, in European equities and they need certainly to reposition before year-end on European equities. Q: What do you think the euro zone meeting in a few days from now yield? There are steps that they are planning towards a fiscal union. Will we see any concrete outcome from the game plan?
A: Any resolution in growth path will be a main question mark. Growth path has been a key announcement at the end of June by European Summit.  
The idea that it could be re-launched in European budget will be approved at the beginning of 2013 and it might be an option. It is likely that the euro group will consider that euro is too high in terms of competitiveness and it could impact positively to the market as well. Q: How do you see flows into risky assets? Over the past three or four sessions we had a debate that emerging markets have had decent amount of inflows and there are some voices that we could see a slight correction. Do you get the feeling from Europe that emerging markets maybe poised for a slight correction before moving higher from here?
A: Correct. We had a very good rebound in most European emerging markets. It is clear that we might see a correction in the next few weeks. Investors are still too much underweighted in European assets and then a switch from emerging market to European assets is likely.