See S&P 500 at 1615 by end of next year: Citi

The expectation of quantitative easing (QE3) from the US Federal Reserve is rising. In an interview to CNBC-TV18, Tobias Levkovich, chief US equity strategist, Citi says he is expecting two things. "One, our economists are suggesting that the language will be extended from 2014 to the end of 2015 in terms of keeping interest rates low. Two, there will be some programme, given the weak jobs numbers last week," he elaborates.

He has 1,425 S&P 500 target for this year and 1,615 for next year. "I would point out that we are little bit ahead of our S&P targets right now. We think there will be some more volatility in September and October, certainly around the elections, unless we are going to get a clear defined trend on who is likely to win the election. Right now, the race looks pretty close," he adds.

Also read: Fed seen launching fresh stimulus, details in question

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

Q: What are you expecting from the FOMC later today? Do you think a big round of QE3 is coming?

A: We think two things. One, our economists are suggesting that the language will be extended from 2014 to the end of 2015 in terms of keeping interest rates low. Two, there will be some programme, given the weak jobs numbers last week. The Fed was already primed to do something and they may extend USD 400-600 billion in terms of buying programme. So, I don’t know if you want to call it QE3, but some form of policy action will be taken beyond just the language.

Q: There is some talk in hopeful quarters that it may even be an open ended asset purchase programme and not even defined one. How high are the chances of that in your book?

A: I am not privy to the Fed's policy initiatives. I think the idea is really to create some sort of programme. I think the Fed wants to provide some option and optionality for getting beyond the elections and then dealing with the fiscal imbalances. But I don’t think they are going to suggest this as their only option, they need fiscal help as well.

Q: Is there any room for disappointment at the end of tonight’s meeting or would you even go to the extent of saying that the steps that you spoke about might have already been priced in?

A: I wouldn’t expect a major sell off. I think you have got a lot of policy activity going on, in general. They will do something. That is our sense. Is it something that’s going to drive everything? No.

QE itself is not what is driving the markets. If that were the case then we would have no earnings growth, we would have no GDP growth, we would have no employment rebound. All these things have happened as well. To suggest that equity market is only about QE, I think is somewhat foolish.

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Q: What kind of targets you have for the Dow, on the S&P 500 for the end of this year?

A: We have 1,425 S&P 500 target for this year and 1,615 for next year. Our Dow targets basically mirror that. I would point out that we are little bit ahead of our S&P targets right now. We think there will be some more volatility in September and October, certainly around the elections, unless we are going to get a clear defined trend on who is likely to win the election. Right now, the race looks pretty close.

Q: We are up 10% since June, do you see this extending?

A: It’s been an interesting risk-on rally. We have seen mixed trends in terms of what's been leading and what’s been lagging. So, it’s been not your traditional buy everything cyclical risk-on. I am a little bit worried about inter-stock correlation having come down. Our panic euphoria model is in complacency mode now. That generally suggests that the markets are bit accident prone.

I am not sure I want to go full fledged into everything cyclical in a risk-on. The markets are already not acting that way. I doubt all of a sudden there will be a shift and every problem, economically is being resolved globally.

Q: So, it is not as if you are hugely bullish from a tactical point of view from here onwards.

A: We are telling to buy growth, we are telling to buy large caps. We still like the dividend story. We think it’s an important part. Money flows in the US, continue to go to income equity oriented funds. That creates an underlying support.

I don’t like the idea of chasing risk, once it’s already had a big move. If we had been talking in June, when we were wildly bullish, I would be right there. Given we had 12-13% in three months; I think we are due for some volatility.

Q: Are you breathing much easier on Europe? Do you think those risks have been mitigated to a large extent after the German Court ruling yesterday?

A: It is certainly good news for Europe. I think people want to get a better feel for the funding and how this actually gets employed. You are starting to hear some scepticism come out about that.

Europe has rallied pretty hard. It is difficult to chase just because it’s going up. I think you need a little bit more. Economic conditions, in Europe, are still going to be challenging over the next 6-12 months. If I was talking about credit conditions in the US, which have eased, they have tightened up a bit again in Europe. So, that is a bit disconcerting.