The relief rally in the bear market is close to finishing

There certainly is more liquidity in markets and that has helped the rally in Asian stocks.

Chairman of securities house CLSA Asia Pacific Markets Rob Morrison shares his views on the Indian and global markets in an interview. Edited excerpts:

Where have the global equities reached after the last three weeks?

I would certainly sit in the camp of those who believe that the relief rally, and I think it’s a relief rally, in an overall bear market is close to finishing.

What makes you say that the trend has not turned?

Hopeful: CLSA’s Rob Morrison says he does not expect Asian markets to retest their lows of last year.Ramesh Pathania / Mint

If you look at the valuations overall, and CLSA’s universal stocks that we cover, we are currently sitting at 17-18 times 2010 earnings. That is fully priced, particularly as there is certainly no absolute transparency on the 2010 numbers and there is certainly some potential for some downward surprises on the 2010 numbers. So 17-19 times earnings you have got to say is taken—that the good news is there. I really don’t think that this rally will last much longer.

If the rally is propelled by liquidity and momentum, do you think there is more left in that liquidity gush?

There certainly is more liquidity in markets and that has helped the rally in Asian stocks. There is no question about that. When you sort of return to greater liquidity, liquidity goes looking for the best investment stories. And our view, CLSA’s view, is definitely that Asia remains the best investment story—short-term, medium-term, long-term—Asia remains the best investment story. So, with additional liquidity, that did help spur markets over here. But they have all had very strong rallies. So liquidity plays a factor in terms of keeping markets moving, getting them started. But it doesn’t sustain them. As I said before, I think that the numbers based on 2010 numbers, these markets look fully priced.

What will trigger off the correction?

I think there won’t be a single event; there is no single trigger there. It is more, as you said, that people understand that valuations are now starting to get stretched.

There is going to be a series of events. I would expect most of those events to focus around Europe. I think the news out of Europe in the months ahead won’t be positive. And that is probably going to put pressure on equity markets.

(Has the market hit) bottom yet... Are you talking about S&P or are you talking even about Asia?

When I said we have not seen the bottom, I was talking about economic fundamentals, or economies. I don’t think we have seen the bottom in terms of some of the key asset prices. For example, housing in the US, I don’t think we have seen the bottom there. We certainly haven’t seen the bottom in Europe yet.

In term of the S&P, as a house CLSA, our view would be it probably peaked somewhere close to that 1,000 number, very close to that at the moment. And then, if that is the case, you would probably be picking numbers around 500-580, something in that sort of vicinity. I don’t think—and to be fair, as a house, it surprised us—the impact on Asian markets through 2007-08, I don’t think we go back to test those lows on Asia. I think there are good reasons why we shouldn’t go back and test those lows. But who knows, last time I didn’t expect Asian markets to react as badly as they did to what was happening in the US. But my expectation would be that Asian markets don’t retest those lows.

How much probability would you attach to the event or likelihood of India going back to its old peak sometime in the next 12 months? Even if there is a correction looming right now, do you think in the next 12 months we can get back to the Sensex highs of 21,000 points?

Not in the next 12 months. Some of the things that will help move the macro economy picture in India would be the pick-up in capital expenditure. I think there is a great deal of capex at the moment. A number of Indian companies were waiting until they have seen the outcome of the election. Also, there have been obvious issues around funding. But I think, with the election out of the way, you will see a pick-up in capex spending, you will also see greater spending from the government... That’s all going to help through 2010, but I don’t think that’s going to fuel a strong equity market rally... But 2010, I think, will be a very good platform for future investments...