Mkts may see 5-10% cut before resuming uptrend: StanChart

Given the recent positive developments on the Indian political and policy front, it is likely that the current rally may have more legs, Steve Brice, chief investment strategist, Standard Chartered Bank told CNBC-TV18.

"Now we are targeting maybe going up to even 6,000 area in fairly short order for the Nifty and certainly international investors are getting less bearish about the prognosis," he added.

Further, he expects the global markets to see a 5-10% pullback before the upward trend resumes.

Below is the edited transcript of Brice’s interview with CNBC-TV18.

Q: We have had couple of positive news developments. Withholding Tax on foreign investors lending to Indian companies has been cut from 20 percent to 5 percent. Also we have got one of the outside parties supporting the government and therefore removing any near-term political instability in any prospect of elections. Do you think both these account for some more legs for this rally?

A: Yes, it certainly looks that way, doesn’t it? If you are looking at the picture for Indian stock market, we had very strong past 2-3 weeks, breaking through some key resistances levels as well. It does suggest that we are seeing some positive reforms coming through from the government.

That’s what we have all been waiting for to say maybe the environment is getting a little bit more positive. Now we are sort of targeting maybe going up to even 6000 area in fairly short order for the Nifty and certainly international investors are getting less bearish about the prognosis.

Q: Could you give us more qualitative information on how exactly FIIs are viewing India as an investment destination at this point in time considering that we have been one of the best performers gaining over 20 percent YTD?

A: I suppose there is quite a great deal of scepticism to start with about the rally. It’s very easy even up to about two months ago to say that the long-term trend to the Indian stock market is still down, that with much more compelling valuations to some degree in China, so a lot of the focus has been on the Chinese market versus India.

The positive aspect for that is it means a lot of people were underweight and therefore are not expecting positive news and that’s given a significant uplift. At the same time, the data out of China has been disappointing and the policy response there has been lagging.

We are seeing this more of a balance coming in. People still are little bit more focused on China, but gains we are seeing now are going to peak peoples’ interest.

Q: How are you seeing the risk rally globally? We did see some bit of consolidation this week globally, but do you think as the US government starts putting in that USD 40 billion by buying mortgage-backed securities in the coming months there will be more legs to this risk rally. What will be your top three risk assets?

A: From our perspective, looking at 12 months time horizon, global equities will be first, high yield bonds will be second and then Asian local currency debt would be our third sort of favourite asset classes. The one thing we are a little bit concerned about globally is that we have come a long way in a relatively short space of time and whether we could see a risk off we still got a lot of risk out there.

We still have to see Spain for instance apply for a bailout and while they are making some noises in that direction we are not there yet. We are sort of getting a bit concerned as we move towards the fiscal cliff in the states.

Markets are expecting a sanguine outcome so are we, but as we get closer to the election, the risks are that people focus on that more. Overall, we will probably see 50-50 chance of a 5-10% pullback before we see the upward trend resume.