See 5-10% pullback in equity markets: StanChart Bank

Steve Brice of Standard Chartered Bank expects to see a 5-10 percent short-term pullback in markets. He says the Sensex can touch 22,000 levels in the next 12 months. "We still fairly constructive on Indian market as well," he told CNBC-TV18 adding, India and China markets have seen strong rallies for the past six weeks.

Brice says the longer-term trend for the dollar against Asian currencies is still down. "We would be recommending our clients to position for that and use any dollar strength as an opportunity to sell," he said. Below is an edited transcript of Steve Brice's interview on CNBC-TV18. Q: What is the market mood as it approaches the important election of this week?

A: Markets are still in a bit of a range at the moment. We believe that markets are likely to weaken until fiscal cliff deliberations are concluded and that is going to be some weeks away irrespective of what happens this weekend. So this is going to be an important period before year end. The economic data out of the States has performed well in recent times. There is lot of skepticism as to whether that will accelerate into next year or even maintain the current pace.

So markets are a bit edgy, not knowing which way to take. We still believe there is a short-term pullback expected and then ultimately a much stronger rally as we go into next year.

Q: Are you clear about which way markets move, given the result of the US verdict? Does the market have a clear favourite?

A: It does come down the policy deliberations. Any outcome that helps get rid of the policy and fiscal uncertainty as to the direction of taxes and spending that is going to be the key focus. So, you can argue if either party got full control of all areas of power. This would be positive because it will allow them to push through the changes they wanted, but that seems unlikely. If you have Obama winning, it looks like the republicans will still have control of congress for instance.

So it is going to be a little bit of muddied situation as far as we are concerned. That is going to make policy making fairly difficult. But ultimately we do expect them to resolve the fiscal cliff issue and the debt ceiling in the February to April period as well. Ultimately, that should be positive but we go through some speed bumps first. Also Read: Nifty may move beyond 5,800 mark in few days: Baliga Q: Do you see the dollar strengthening more in the near-term because it seems to have got up a bit in the last couple of days?

A: As far as dollar fits in with our short-term risk aversion environment, we would expect it to be little bit stronger against both the major currencies. But particularly against Asian currencies, which have seen a lot of capital flows coming into this part of the world, into equity markets and more importantly into bond markets.
 
So, there is a change for that to take a bit of respite as we get this risk-off environment hitting us for short period of time that is dollar supportive. But the longer-term trend for the dollar against Asian currencies in particular, is still down. So, we would be recommending our clients that position and use any dollar strength as an opportunity to sell.
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Q: How deep a pullback are you expecting?

A: In terms of the equity markets, the pullback we are looking is around 5-10 percent. We are about 4 percent off the highs at the moment, so probably another 2-6 percent coming through. It is possible that these get a little bit more momentum in the downside.
 
We predicted the same thing at the beginning of the year. In March we are expecting 5-10 percent, actually it was 13 percent, so we might see a little bit more. Key support is actually not too far from where we are now, so we are at a pretty critical juncture as we go into election.

 

Q: Any thoughts on India and how that might pan out and perform in this environment?

A: Obviously you had a pretty good year so far, particularly in recent times the government’s reform methods are a bit positive. I think market is still skeptical on follow through the fiscal consolidation plans. That is going to be pretty key, getting further details and obviously crucially making some steps towards the fiscal consolidation.

But as far as corporate earnings picture in Asia and in India, we are now less concerned about earnings outlook. We do feel the Sensex can get over the next 12 months or so, upto 22,000. So we are at such a neutral weighting for our asset allocation model. It is not an overweight but over weight global equities.
 
So, there are markets we prefer to India, China being amongst them obviously since we have seen a very strong rally there over the course of the last six weeks. But overall we are still fairly constructive on Indian market as well.