Mkt expects near term dips; offers buying opportunity: HSBC

As newsflow from the eurozone has deteriorated there is some amount of cautiousness in markets around the globe. Arjuna Mahendran, MD and Head Investment Strategy Asia at HSBC Private Bank believes the markets at the moment are expecting near term dips and since it moved up quite a bit in the last two months, it would be a healthy development.

Also read: Budget 2013: Mkt consolidation on; no Budget surprises, says Baer Cap
In fact, Mahendran feels any dip can be utilised as a buying opportunity. Here is the edited transcript of the interview on CNBC-TV18. Q: Are you sensing any change in the risk-on sentiment ever since newsflow from the eurozone has deteriorated?
A: Not really. In fact, though there is a slight tone of cautiousness in the market which is natural, the key factor is that the market expects some form of near-term dip and not a very sharp dip I would reckon. The expectation is that we have run up so fast in the last two months that it would be healthy for some sort of a dip at this point.
From that perspective, if we had any weakness in the market, I do not think it will create too much panic or anything of that magnitude. On the other hand, I think any dip would be greeted as an opportunity to buy. Listening to your commentary just now about the mid-caps looking attractive, this is something that we found across Asia over the last two-three months. The mid-cap space has been running.
In fact, now the small-caps in the more liquid markets like Japan, Hong Kong and Singapore are starting to move. I think this risk-on which started last September is for real. Definitely the sentiment is positive. The markets are telling us something which is that the forward looking outlook for the global economy is positive. I think this should persist for a while. Q: What is the general mood in India? Is it being seen as last year's outperformer and therefore something to get cautious on because the flows have been strong but, we hear mixed commentary on how it can do this year?
A: The amount of foreign money flowing into all these markets has been phenomenal. When you think about it in India, it is getting around USD 4 billion and the magnitudes are quite staggering. This is likely to continue because it is real money and it is coming from long-only as well as some of the hedge funds who are invested in this space.
You see this in Thailand, you see this in Indonesia. All the countries across the region are doing very well, in particular North Asia because that was the laggard region last year. So, north Asia is playing catch up. They are probably doing better right now. China's valuations are much less stretched than India’s and it is indeed a case in south-east Asia.
Having said that, I would say that this is serious money looking for opportunities in valuations etc. That is why it is the perfect environment, I feel, for long short sort of approach because you will have the leaders and the laggards and a lot of rotation going on within stocks. I do not think India fails in comparison to other markets from a long-short perspective. I think it is in fact very attractive because of its liquidity.
_PAGEBREAK_ Q: If you look at the next couple of months, what to your mind is the central risk to this benign risk-on environment that we had for the last four-five months?
A: In my view, there are shades of 2004 in what is going on right now. I say that because Japan is a key factor. People tend to underestimate the impact of Japanese policy on the global economy and to me, this is a re-run of 2004 when indeed the Bank of Japan (BoJ) opened the spigots in terms of monetary creation policies in the last episode. Then through 2005 and 2006, you had a very good rally in the Japanese equity market and the currency weakened. That dose of liquidity coming into the global markets is part of the reason why you are seeing this risk on.
From that perspective, I think the outlook for the rest of the year should be fairly benign. The risk I would see would probably be something to do with the South China sea dispute between Japan and China or perhaps this fiscal debate in the United States, though given that the democrats have got a bigger majority in the senate, I do not see US President Barack Obama having too much of a problem in resolving that issue. It may drag out for a while.
Then perhaps the Italian elections at the end of February may have an impact. Italy has the fourth largest sovereign debt in the world and if there are any rollbacks in terms of austerity programme, this could disturb the European debt market. Those are some of the risks out there.
To be honest, I think this sentiment of risk-on is so overwhelming, if there is any dip, it will be quite shallow. Q: Is it still a tactical call on equities, though based on the premise that liquidity is abundant, so markets could be played on the long side or do people believe that this has the makings of a bull run?
A: You have the glimpses of a bull run coming through. Obviously, the key factor is the United States. If the American economy can grow at about 2 percent or slightly above that, it would be fantastic and would give legs to a bull run.
To my mind, I think the more intriguing prospect is that you see a decoupling between the emerging markets and the developed markets. So the US, Europe will probably trade a range whereas in the emerging markets, particularly the ones that have lagged like in China, we could see a real bull run emerging later this year.
Again, it is tentative science because the Chinese government as you probably have heard, have imposed a very strict austerity programme on official spending, government spending on entertainment and things like that. It is a bit of a mixed reaction in terms of how the market anticipate consumer spending etc going forward.
Having said that, I think there is a lot of upside potential in equities. So, I would see that going forward. Q: Do you expect to see a big position build up and by extension a big reaction amongst the institutional investors around the Indian budget, is that a big event for money?
A: Indian budgets typically over the last few years have not given us much of a positive surprise, unfortunately. In fact, you have had a lot of reforms coming outside the budget in India and if that pattern continues then it is not going to be much of an event. Though, Mr Chidambaram has been on a road show, he has been telling us positive things across Asia and that has built up expectations to some extent.
I think yes, there would be some interest in the Indian budget, perhaps more so than in previous years but let us wait and see. I think the other events in the US which takes place on March 1 and the Italian elections may overshadow the Indian budget to some extent.