Global markets may make lower low around mid-2012: AMP Cap

This week has been tough for the global markets. Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors says, the markets could see a bit more downside in next few months. However, in the near-term, he expects a bounce back.

According to him, next month will remain fairly volatile. “The situation in Greece won’t resolve itself until we get to June 17 and see how the Greeks vote. In that period, I think we will see fairly intense uncertainty,” he elaborates. He sees a lower low in the next couple of months, around mid-year. "The flows have been incredibly sharp, particularly this week. Therefore, I think that policymakers around the globe will be galvanised into action a bit faster than occurred last year. So, I am hopeful we will get to new highs by the end of the year," he asserts. Also read: More turmoil to come, buy real assets, says Jim Rogers Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: It’s been a rough week for equities. Do you sense there is much more by way of price damage coming for markets? A: There could be. Technically, there is support for the US S&P 500 around the 1,280 level, another 2-2.5% on the downside. So, hopefully that would be it. That would result in a correction from top to bottom. That’s the case for global shares. We could see a bit more downside in next few months. I think that largely comes about, because the situation in Greece won’t resolve itself until we get to June 17 and see how the Greeks vote. In that period, I think we will see fairly intense uncertainty. In the very short-term, we would have to say markets are oversold; something that won’t surprise me is to see a bounce in the next couple of days. But I think the next month will remain fairly volatile. I think this year in some ways is a bit more like 2010 where a lot of the damage was over by the middle of the year, whereas in 2011, the weakness really took hold through the September quarter and didn’t really end till around September-October. This time around it seems to be occurring a lot earlier in the year. Therefore, I suspect that by the time we get through the September quarter, we would actually start to see decent gains in markets on the back of more monetary easing by US and European authorities. Q: We have a report from CLSA this morning. Chris Wood is suggesting that we may have seen highs for the year in the month of February, but you are saying that we could probably make a low in the next four to six weeks. A: A lower low in the next couple of months. Around mid-year, I think that would probably make the low points. The flows have been incredibly sharp, particularly this week. Therefore, I think that policymakers around the globe will be galvanised into action a bit faster than occurred last year. Last year, markets peaked around April and May, didn’t really start to fall heavily, until we got into June and July and in particularly August. So, the weakness took a lot longer to take hold, whereas this year it’s happening a lost faster. In 2010, the flows were concentrated particularly in May continue to bid through June-July, but the policymakers acted relatively quickly. In consequently, that sort cushioned the markets and you had the recovery through the second half of the year. So, I am hopeful we will get to new highs by the end of the year. Obviously, at this point in time, with markets off about 2% today around the Asian region, it’s hard to feel optimistic about things and it’s hard to see where it will end. But by the same token, I reckon around September-October last year we weren’t feeling particularly confident either. No one was feeling confident around late June, early July in 2010. So, no one feels particularly happy, if markets are coming down. It’s always hard to see where it ends. I think we do know that shares are quite cheap around these sorts of levels. Sovereign bonds in safe countries are becoming very expensive. We have got new record lows for US bond yields. In Australia, the 10-year bond is also just a couple of basis points away from a record low in yield. So, not a lot of value left in bonds. There are also a few positives around the world, if you sort of have a look for them. Japan is growing. A year ago it was going backwards on the back of the earthquake. We haven’t had the oil surge to sort of weaken household budgets in the US like we had a year ago. Chinese, Indian Central Bank are easing policy, a year ago they were actually tightening. Ofcourse as I mentioned shares are cheap. So there are some differences to what we have seen over last couple of years, which hopefully should provide a bit of a buffer. Q: There seems to be a very large degree of disenchantment with the emerging market, BRICS space though. A lot of people are criticizing the kind of growth they have seen and underweighting significantly on these markets and targets. Is it a function of the environment? Do you think emerging markets will bounce back or do you think something has changed in terms of the stance of interest in these markets? A: Well, that’s a good question. When you look at Asian shares, they have come off by more than US shares, more than traditional global share markets have come off by. In the sort of context of bear markets or frozen markets, that is not unusual. They tend to be high-beta. So, emerging markets usually tend to get sold-off by more. I think that reflects the fact that the marginal investor in the emerging world is actually located in the US or Europe. Whenever the Americans or the Europeans get upset about the things, they tend to take their money out. That ofcourse causes the emerging markets to come down by more. So, that factor is the predominant driver of emerging markets at the moment. They are just behaving in accordance with their normal high-beta relationship to traditional markets. That said, there is a bit of the shine coming off. There is a lot of talk about the Chinese economy slowing down, harder to get the sort of growth that it was used to, 10% or so growth rate. China looks like its going to end up settling around 7-8%. So that’s taking a bit of the pressure off. Commodity prices, which are good in terms of inflation but not so good in terms of Latin America or in Brazil in particular, Brazil is seeing its trade decline. Therefore, interest in each share market has waned somewhat. In India, as you would be aware there is more of a problem with inflation. So the Indian economy has slowed. The inflation figures earlier this week were little bit higher than expected. That ofcourse is putting a bit of a break on the extent to which the Reserve Bank of India can ease monetary policy. So, all of those things are putting a bit of cloud over the emerging world. I don’t think there are chronic problems. I think they are really just cyclical problems. They are nothing compared to the issues that Europe faces with its debt problems or in a longer term sense the US faces as well. But it’s just that they are getting a bit of tension in this environment, given that Europeans and Americans are doing what they normally do and that is they sell emerging markets when there is a bit of uncertainty around.