Use correction as an opportunity to buy equities: StanChart

The global markets have taken a breather before the Jackson Hole meeting on Friday. Everybody will be keenly watching Ben Bernanke’s speech at the meeting.

In an interview to CNBC-TV18, Steve Brice, Standard Chartered Bank says the Fed is unlikely to ease policy at the September 13 meeting. "I think that’s going to be the communication we get from Bernanke on Friday," he adds. According to him, there is 60% probability of a slight pullback in equities, maybe 5-10% in the short-term. "But we would be advocating that people really use that as a buying opportunity," he asserts. Multibagger ideas: SP Tulsian's 2 picks for good returns Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee. Q: Are the expectations from Jackson Hole meeting priced in or are you open for surprise? A: I think people are starting to shift away from the expectation that we will see something significant coming out from Jackson Hole. That is actually a good thing, because our view is that the Fed is unlikely to ease policy at the September 13 meeting. The data has been improving recent times, probably sufficiently for them to say, we don’t need to do it yet, let’s wait and see what the data comes out. I think that’s going to be the communication we get from Bernanke on Friday, indicating that it’s there, if we need it. But with the slight improvement in the data, we have seen over the past four-six weeks, it may not be the time to actually use that ammunition. Q: Do you see the risk of markets reacting or do you think the markets by Friday will get to a point where they say that we should not expect too much and therefore there should not be any great kneejerk reaction? A: I think that’s obviously what Bernanke wants to happen. Obviously, he will be wordsmithing as much as he can to try and limit the market impact of this transition phase from people expecting some monetary easing to it may come further down the road, possibly we get through the fiscal cliff at the beginning of next year. But we have got the VIX index. Last week, obviously it went well below 15. Every time since the global financial crisis, we have seen a significant pullback in equities. There are some positive factors. If you look back 2004-2007, the VIX index actually averaged below 15. So, we are probably caught in the middle of those two arguments at the moment. Our view is that there is probably around 60% probability that we will see a slight pullback in equities, maybe 5-10% in the short-term. But we would be advocating that people really use that as a buying opportunity. We believe there is a big reflationary effort coming down the line, probably more actually from Europe and China then from the US. That’s what investors should be preparing for. So, use that weakness to get in and average in to make sure you are not underweight equities in the next month or two. _PAGEBREAK_ Q: Ten percent would not qualify as a very small pullback, if that happened. Are you really expecting to see the S&P below 1,300 in the near-term? A: I think we are looking at more the global index rather than purely the S&P. The S&P certainly looks more protected these days. It does have one of the most proactive central banks in the world. That does help us in terms of keeping our overweight stance on US equities, when we are looking at over the next 12 months. Clearly there are much deeper valuations in rest of the world. We did upgrade Europe, for instance, from underweight to neutral just last week on the view that most of the monetary easing actually will come from the ECB. That’s a positive development. But, overall, we have been overweight equities now for a few months. We are increasingly convinced that it’s the right approach. If you are looking at 6-12 months, valuations are very cheap versus other asset classes and versus their history. With this monetary stimulus, it’s something that could create that run up in equity markets. So, yes, there is a short-term risk, but it is probably a great opportunity. The risk is that you don’t actually see that correction in the first place. Q: It appears Mario Draghi won’t be there at Jackson Hole, but we have got a meeting of the ECB on September 6. On the European front, do you expect to see anything which can restock or galvanise this risk-on rally? A: I think that’s one of the reasons we should say maybe there will be a little bit of pause here before we see new highs in the global stock markets. We have got a very heavy calendar coming up in Europe, whether you are talking about Constitutional Court ruling in Germany, the Dutch elections, the banks’ stress tests in Spain, the Troika ruling on Greece and then the French budget at the beginning of October. So, there are a lot of events out there. The market is taking a pretty benign view of those. The outcome is likely to be generally benign, but we will get speculation in the interim that will make people a little bit more concerned that this is just another false tone for Europe. We believe that in the next three-four weeks we might well see that. So, people just taking a little bit of money off the table, but then ultimately once we get the ECB action being clear and being implemented then that would give way to another risk-on rally or an extension of the current risk on rally.