See 9-10% upside for US markets this year: Sean Darby

In an interview with CNBC-TV18, Sean Darby, equity strategist at Jeffries, spoke about his views on the global markets and his outlook.

Below is an edited transcript of his interview on CNBC-TV18. Also watch the attached video. Q: Global equity markets remained calm post the S&P downgrades of nine European countries on Friday. Do you think this was largely factored in?
A: We did expect European sovereign credit to be downgraded at some point over the year. I suppose the best time for the authorities to do that was post the introduction of the ECB liquidity facility which has perhaps allowed the financial markets to be relatively calm. In the longer term, we still would see that there would be successive downgrades going forward as governments have to absorb further shocks from the financial system. Also, it would become increasingly difficult to reach fiscal targets. Q: How will global equity markets move over the course of the next few weeks?
A: At some point, they will have to absorb the news of either a soft or hard default from Greece and whether or not the authorities will continue to provide good money to bad lenders. Ironically, what the equity markets need to find is essentially a clearing process that will have to be undertaken in Europe, and I think they will need to see the credit markets clear in the Euro zone for equities to advance. Q: Do the S&P downgrades once again bring Europe into the centre of global risk attention? Will Europe trigger another slide in global equities now?
A: Ironically, it does put the Euro zone back in the main frame of investment. Just as that is occuring, the US seems to be gradually escaping the problems in the Euro zone, so the Eurozone equity market will still outperform despite the travails of European economies. In the shorter term, you will have to see equity markets weaker from here. Earnings will have to be a horror and we are already getting a slew of weak economic data from the Eurozone. Q: Would you look to buying into any potential weakness that we may see in the markets?
A: Yes, I think overall equities offer a very good value proposition, certainly relatively better than a lot of the other financial assets and government bonds.  I think it is just a case where one has to accept that there will be a period of volatility and that is not falling too much in love with equities. Q: How big a worry will Greece become after the debt talks reached a stalemate there?
A: The decisions that are made by politicians have binary consequences but also have unintended issues, and I think it is the unintended problems for financial markets, whether or not it pushes other countries to also default or indeed whether it means other financial systems face liquidity crunch, so yes, it is a very diffcult problem to quantify a guess. Q: US markets have been resilient in 2011, can the outperformance continue?
A: We think US probably has the best performance in terms of relative returns. Also, it will be less volatile than a lot of the other developed markets, it may not necessarily produce as much upside but we think the share price trend will be a lot easier for investors to stomach rather than the big lurches that we expect coming through the Euro zone. Q: Macro data has been strong but is that a blip? Is there a risk of recession?
A: That was the fear last year and it did not play out in that way at all. The US may actually initially produce quite strong data. Certainly, it is an election year and we would still feel that the US economy has got good tailwinds. The likelihood is that the US would be able to absorb most of the shocks coming from the Eurozone because exports from Europe are a relatively low portion of total exports. Q: Do you expect another round of quantitative easing by Fed later this year?
A: We have got pencilled in a further QE program, potentially buying more mortgage backed securities, and if indeed things were to deteriorate rapidly in the Eurozone, I am sure the Fed has got extra ammunition in terms of quantitative easing that it could undertake. Q: What is the year end target for S&P 500?
A: We have got about a 9-10% upside for US equity markets this year overall, excluding dividends. Q: What is your view on emerging markets in 2012?
A: We do not see any major disasters. We think the equity markets are trapped in a little bit of a stagflationary environment. Given that, maybe policies are not loosened quickly enough for equity investors. But overall, we do not think that the asset class could disappoint too much compared to the returns of 2011. Q: Have you changed your view on India after the big under performance last year?
A: Not within the global portfolio; we are still relatively underweight. Our Indian strategist, who has been very bearish, and correctly so, has turned a little more positive. I guess once balance of payments begins to stabilise and growth starts to see some form of bottoming out process that should restore foreign investor confidence. Q: What are the key headwinds for Indian equities this year and are they priced in?
A: I think the major one really is the oil price. After a sustained period of high oil import, it has eroded the c/a and equally, you would need to see a stabilisation in forex reserves. Overall, the best move by the Indian authorities would be to encourage more opening up of the equity markets and possibly again to go back and revisit the whole theme of encouraging FDI. Q: We haven't seen FII capitulation yet for Indian equities, is that a risk going into 2012?
A: I think the authorities in India are moving along the same path as most emerging markets have undertaken during their financial progression and it is no different than what you saw in Taiwan & to some extent in China. Countries which want to have foreign investment, have generally been little bit more conservative about how that is drawn in & out of the financial system, So I think the measures that India has undertaken recently probably do go a long way in terms of providing confidence for foreigners to come and buy Indian equities. Q: What is your view on the rate sensitive sectors?
A: It is not for us at the moment, if I remember rightly, our strategist tended towards more IT plays and to some extent some of the consumer-oriented stocks. Q: Which are the key sectoral underweights/overweights in India this year ? Should investors continue to own defensives?
A: I think the markets will probably want to have some degree of defensiveness in them because the earnings are still subject to further cuts. Our Indian strategist has also turned more constructive towards equity markets and I would argue that that is very correct. I think probably at some point in the first or second quarter, we'll see the worst of the earnings cycle, if oil prices were to fall that would mean that Indian equities would do very well. Q: What is your view on Asian currencies including the rupee and will that impact FII flows this year?
A: It has been a strange 18 months. Emerging markets have underperformed the developed world. Currencies have come under much more pressure; many of the rates have been coming down and the fact that people have become more risk averse. I guess we do not expect too much major divergence for the exchange rate, so there was a bit of overshooting end of last year, but we do not see any sustained decline in Asian exchange rates. Q: The recent global macro data has been good, but will EU's deleveraging story continue to weigh on Asian markets early in 2012?
A: Part of the QE process is to allow fiscal expansion without rates going up, but also the household sector is deleveraging alongside the financial sector. I think really that is an assurance policy for the authorities to ensure that they are not growing without the risk of lurching back into deflation, so I am not necessarily scared by the deleveraging cycle. But I think the authorities need to back stop that with the fiscal program. Presumably once it starts to end in 2013, there may be more of a risk to equity markets on the downside. Q: What is your view on the dollar?
A: We are more constructive towards the greenback mainly because other countries are now doing quantitative easing and cutting rates, also the fact that we are seeing a much better external export environment for the US which should be dollar supportive. Q: What is your view on commodities, including crude?
A: I guess with commodities, the major moves have tended to be exacerbated by either natural disasters or as we have seen more recently issues between different nations such as Iran & the west. I think that is still the case for commodities in 2012, I think people are still buyers of hard assets but the best potential gains are made on the back of changes in weather conditions or problems resulting from natural disasters, or indeed policies to undertake QE which is generally supportive for commodity markets.