Global markets looking at 8-10% correction: StanChart

The global markets were already apprehensive of the European elections. The BSE Sensex too dropped more than 1% on Monday, as global risk assets sold off after elections in Greece and France fuelled questions on their austerity policies.

Steve Brice, Chief Investment Strategist of Standard Chartered Bank in an interview with CNBC-TV18 said that the global markets are halfway through an 8-10% correction.
Brice further added that the results of the Greek election are likely to have far greater impact compared to the French ones. According to him, post-election policy changes in Europe will be the key for the global markets. Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video. Q: How have you read the kind of initial reactions we have seen across Asia to events in Europe? Is it looking like a knee-jerk response or do you think this indeed is the start of the big cut people feared in May?
A: I think we will see a little more correction going on from here. We have been talking for two-three months now for an 8-10% potential pullback and we are about half way through that, just about 5%, as we have closed business on Friday. Obviously, it is continuing today as well.
From our perspective, with regards to the French President election, uncertainty in the short-term is going to increase around the policy direction in Europe. But, we would argue that is not necessarily a bad thing. The idea that austerity at all costs is a policy that is winning, I think is a little bit outdated.
So, the key is to have these conversations about what is a better response, clearly not leading to fiscal irresponsibility but just pushing forward with a less anti-growth agenda. I think it is going to be pretty critical.
We are going to see a very key test in the short-term with regards to Greece. The election results there are more worrying with coalition looking like if they can get a majority, it would be very small. That is going to be a bit more challenging. Q: How do you think the Greek outcome will go down with the market, considering the way the polls are heading? Do you think the possibility of Greece going out of the EU once again might come back on the table, something which had faded away completely over the last three-four months?
A: I think it is obviously not frontline news but, a lot of people have always been arguing that issues related to Greece still has to be resolved. Implementation of the austerity measures that have been promised was always going to be challenging. To be honest, even irrespective of the political landscape, it is going to be the more so.
So, how that plays out against the backdrop of potentially changing policy priorities at the headline level in the rest of Europe is going to be very interesting. I think this is probably going to be some sort of negative volatility.
One thing I would say is that we underweight Europe from an equity market perspective. But, I wouldn't get too stressed about this from an international perspective. The reason for that is if you look at liquidity stress in the banking sector that has been falling. The contagion is likely to be lesser this year than it was in 2011 in our opinion.
Q: What do you expect to hear from the US? Do you see the problems being compounded by poor economic data like the payroll's number we saw on Friday? Or do you see the US holding out in the face of poor European news flow?
A: Our view is that the US economy will just continue to muddle through. There is a very significant pent-up demand in the auto and housing sector in the States. The key question is, are consumers going to give-in to that pent-up demand?
If you look at the loan offices' survey that suggests that is already happening, credit is certainly becoming more available. There is more demand for it as well. So, the consumers are doing reasonably well. Employment data was disappointing. Admittedly, we did get some backward upward provisions, which softened the blow a bit.
But, in case we are not going to see an increase in 200,000 sustainable jobs a month, we are more in the 150-200 region for the rest of the year. That is still consistent with a relatively okay economy. It is not 3-3.5% growth, it is more likely to be in the low 2s. But, that wouldn't disappoint current market consensus. Q: What kind of downside risk would you say is present for emerging markets now? If you spoke to someone in the early part of last week, they would say maybe 5-7%. Would you say it is looking like a deeper downside risk now for emerging markets in particular?
A: I think we would be still fairly okay on emerging markets. We have recently downgraded Asia from overweight to neutral and raised the US overweight from neutral. So, that was the switch we took there. That doesn't mean that we feel Asia is going to be badly hit by what is going on. It is just that we believe that the fundamentals in the US have improved by significantly.
Within Asia, we are going to be differentiating quite significantly. We still prefer China over India, valuations are much more compelling and we believe more on China than in India for the short-term. The newsflow in India still remains very negative. In China, it is not overwhelming or positive by any stretch.
But, we do believe the worse is behind this for the economy in China and that should support the markets as we go into the six-twelve months view. India has a lot to get through on the domestic as well as the international side before I would become more constructive. So, we are structurally constructive on India but cyclically, still a bit worried. Q: Prompted by events in Europe, what is the opinion amongst the StanChart economists on whether we are headed for another global recession at the latter part of this year or not? Do you think it is just a temporary issue that markets are dealing with?
A: We don't believe that we are heading towards a global recession at all. In the US, we are talking about muddle through. Perhaps even in the States, muddle through minus in Europe which is clearly recession in the short-term. If any positive growth comes in the second half of the year, it is likely to be very sluggish.
But Asia is picking up as we move through the year. We are all looking for the increasing domestic demand in China as a huge leading indicator to come through. That is certainly not coming through in the data but we do get retail sales and industrial production data at the end of this week. That is going to be pretty critical for sentiment as well.