Mkts may pause for breather; bullish on equities: HSBC

Herald Van Der Linde, Head of Equity Strategy, Asia-Pacific, HSBC believes global markets have fared well right from the beginning of 2013 and therefore, it may not be unlikely to see it taking a bit of a breather. According to him, there are chances of some immediate risks with events in the US and Europe playing catalysts.

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However, Van Der Linde remains hopeful about equities and feels it is going to be a decent year. Hence, "Any retreat in market is probably a good opportunity to start to buy a little bit more," he added. Here is the edited transcript of the interview on CNBC-TV18. Q: What's your sense of how global markets will play out in the near-term? Tactically, do you see some kind of an intermediate risk off brewing in the world?
A: Yes, I do think that is probably a little likely. If I look at 2013, for the full year Asian earnings will grow about 14 percent. Price-earnings (PE) ratios are rather low. So we could see a slight increase in PEs, maybe 3 to 4 percent and you add a dividend yield to that.
I think your expected return for Asian equities throughout the year is about 15 to 20 percent. But, in the first month of the year we have had quite a lot of that already. It is not unlikely that markets will take a bit of a breather.
In addition to that there are a couple of events coming up in Europe and United States (US) which might cause or act as a catalyst for that breather. We have run well, but maybe it was a little too fast, too quickly and I suspect we are going to see a short tactical retreat. But, I am not too worried about that whatsoever. I think throughout the year we are going to have a pretty decent year in equities. So any retreat in market is probably a good opportunity to start to buy a little bit more. Q: How deep do you think this correction could be given, how much markets like India have run up through the course of last year and at what point would you look to buy into them?
A: I think if you look at markets in general, in Asia typically, in up swinging markets what we seem to be witnessing at the moment is that downturns are not very deep and they are rather short. So we are either going to have a sharp selloff over the next couple of days and we may see a 4 to 5 percent sell off very quickly and then it may bounce back very quickly or you get something which is more sidelined over the next couple of weeks. We have actually seen this over the last couple of weeks already.
Over the last two weeks, markets have moved significantly high, which really is the early part of January. This is as I said, is for the broader Asian markets within that. Hence, countries look a little bit more at risk, particularly high PE markets like Philippines for example. India is a little bit in the middle of the pack.
The disadvantage India has is that it has actually performed very well last year and has been one of the better performing markets. It is probably not going to perform as much as some other markets which really come from a low base and I am particularly thinking about China here.
_PAGEBREAK_ Q: You have alluded to certain events which might trigger off this correction. Europe came back as a talking point with bond yields in Spain and Italy last night. Do you expect Europe to lead this kind of correction or trigger off this correction that you are talking about?
A: I see a couple of areas of upside risk, but there are a couple of areas around the globe where we need to keep a good focus on. The European situation has improved, but it is far from optimal. So Europe will come back at points in time and yields presumably, will remain very volatile.
In addition to that we have a couple of elections, in Italy of course in the more immediate-term, but in the later part of the year also in Germany. That's going to be quite important as well. And yes, in the run up to these elections, you got rhetoric etc. which can create a little bit of uncertainty as well.
We shouldn't forget about the US. Growth is improving there. Parts of the US look pretty good. I was there last weekend. Housing prices seem to be moving quite substantially high, at least in the places where I visited them.
But yes, there are still discussions on debt and fiscal restructuring, which needs to take place and some of that has been pushed a little bit forward till the fiscal cliff, which we spoke about earlier in the year. But, some of that has been pushed forward into March-April-May. So those issues will come and haunt us back as well. They will create uncertainty in markets and yes, that could lead to a little bit of a selloff in particular, after we have had such a strong rally. Q: I see from your note that you expect to see between 19 to 26 percent returns from many Chinese indices. Would that be at the cost of a market like India because last year that seems to be the call as China was the underperformer and India the outperformer in the Asian region?
A: Yes that's correct. I wouldn't phrase it as such that India will not perform at the expense or the benefit of China, so that the increase in China is at the expense of India. I would rather phrase it slightly differently. I think we are going to see net net inflows into equity funds globally. There is already evidence that this is taking place.
A lot of people are talking about the move, the rotation from bonds into equity – that’s not really taking place yet. But do equity funds see net inflows? Within global equities we see a disproportionate amount of that going into emerging markets (EMs) and within that Asia receives a disproportionate amount as well. So, we all benefit from these inflows.
It is just that one country receives a bit more. Look at China, look at the valuations, growth is recovering and valuations are good, it is 25-30 percent cheaper than your average stock in India. Your growth looks much better, some of the uncertainties in China have been taken away and I am thinking about for example the political transition which we had last year.
So yes, China looks a little bit better. I will think it will receive more of the inflows than India. But I don't think that people will sell India to buy China necessarily. Q: What's the positioning that you see from most of your clients towards India right now because at the start of 2012, most clients would have been terribly underweight? Would you say that most that has changed through the course of last year and funds are reasonably overweight on India now?
A: Yes that is indeed correct. We do some work on mutual fund holdings across the region. We have very little visibility on, for example hedge funds. But, there is a very large pool of mutual funds which we track. The overweight markets are the Philippines and India to a large extent.
If you compare, the ratings are not completely maxed out in India over the last five years. But, they were pretty close to that and therefore, most funds are as much overweight India as they probably want to be. They tend to be somewhat underweight on China, a very underweight on a couple of other markets including Taiwan and Indonesia. But, this probably means, it comes back to what I mentioned to you earlier.
If additional money comes into the region, which is very likely, we are going to witness something like that. I don't think a lot of that will go into India and that disproportionate amount will go into China.