See tough environment for global markets ahead: StanChart

The global markets are now entering a more challenging environment, says Gerard Lyons, Standard Chartered. "I think global equities will have a different end, in my view, to this calendar year," he adds.

Also read: India rating outlook remains 'stable', says Moody's

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Q: How worried are you about the uncertainty with respect to the Spanish bailout? The terms of agreement quite clearly are creating a problem within Spain itself. When do you see it perhaps getting eye on doubt and Spain actually asking for a bailout?

A: I certainly think that people should be worried about Spain. Spain, certainly, will provide further uncertainty for the market. In recent weeks, there has been genuine improvement in the sentiment in global markets. But that is a temporary situation. The improvement in the sentiment has been because of the actions of the major central banks including European Central Bank. The time of the actions of European Central Bank, a few weeks ago, some people thought it was a game changer. It had changed the environment. I didn't.

I thought the actions of European Central Bank were good. But they were a time buyer. They had bought more time. And the reason I think they had changed the situation is largely because what we are now seeing in Spain and some other economies on the periphery. So, I am worried.

What the Spain have to do? Ultimately, it needs a return to economic growth. That is the key issue. The markets and policy makers really should be asking, ‘where is growth going to come from?’ But they are not.

Instead the near-term focus is important secondary issues like the stress tests this Friday. That is likely to show the need for Spain to borrow or have access to at least 60 billion euros. The budgets this Friday, which is likely to implement another round of austerity, will please some of the policy makers, but will not help the economy.

The big issue is whether the Prime minister will ask for access to the funds that will allow the ECB to buy bonds. He should. He will. But he might not do it just yet, preferring instead maybe to wait out after the regional elections later in October.

Q: How do you look at the way the ECB officials have responded saying that they will not partake in potential restructuring of Greek debt?

A: No. If it's not Spain, it is Greece. If it is not Spain and Greece, it is Portugal. If it is not that then it is Italy and Ireland. It's a problem. It is the same issue rate increase as it is in Spain. Where is the growth going to come from?

Greece, as we all know, is in far more difficult situation. The Germans are playing hard ball to use the American terminology, they are being pretty tough. But politics as well as economics comes into play here. There is every indication that Americans are putting pressure on the Troika to delay releasing their report so that no nasty surprises occur before November US elections.

There are suggestions that chancellor Merkel would like to help Greece out to buy things over, until after the German elections next year. But, in the very near-term, there is a financing gap on at least 20 billion Euros. That needs to be addressed. The likes of Italy and Spain clearly want to help Greece out.

But I think what really comes down to is a continuation of the same problem we have seen before. Ultimately, it is the weakness of growth. You could say it is the policy stance that Greece is being forced to buy into further tough austerity and supply side reforms. Overall, I think problems in Greece will persist for some time.

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Q: As we head into the year-end, what is your prognosis of how global equities will pan out?

A: For global equities, it is a very challenging environment, not just because the uncertainties and challenges we just talked about in Europe, but what we are seeing from the US is also particularly interesting or maybe worrying for equity perspective. Earnings growth is not matching expectations. Companies are trying to downplay expectations. Top-line revenue growth in US market is faltering. That would suggest that we are in a more difficult phase of the economic cycle.

Equity markets, in many countries, particularly in the west are discounting good news with the dividend players, income players doing relatively well. I think we are now entering a more challenging environment for global equity markets.

The one positive is the continued actions of the central banks; Americans, European, British, Indians, Chinese, Japanese basically providing liquidity. That in turn is helping underpin some of these markets. But I think global equities will have a different end, in my view, to this calendar year.

Q: Many foreign market watchers are getting incrementally excited, even bullish, on emerging markets vis-à-vis developed markets. Would you concur with that?

A: Yes. There are a number of ways for looking at this. People can look at it from bottom up and ask what is priced in? Where are the assets cheap? And in that respect one might argue that Asian assets look good value.

Another way of looking at this is top down and saying that global growth is more challenging, but where are the better opportunities within that. I have intended to look at it from both perspectives that highlight the macro economic one.

In 2010, the world economy grew 4.4%. Last year, world economy slowed, but still grew by about 3.1%. At the end of last year, we had the most pessimistic forecast out there. We were proved right.

Our latest expectations of global growth this year is 2.5%, a significant slowdown from last year. It could pick up next year to shade over 6%. In some respect, for equities and for investors, it is like an invisible recovery. Technically and economically, the data shows recovery, but it doesn't feel like it for most people.

Within that, if the world economy does show momentum next year, it is more likely to be led by emerging economies and that is why some people are more optimistic.

What happens to the fiscal cliff in America? The likelihood is that elections this year will return the status quo; what we currently have in terms of president Obama and congressional senate and the republican congress.

The other big issue is China. China is slowing. So far, it is a soft landing. But the near-term question is whether it becomes a hard landing or remains a soft landing.