Globally, markets are not reflecting the imminent recession in Europe, says Jim Walker, renowned economist and managing director at Asianomics. He also says that the current rally is driven by misplaced hope about Europe.

What is your assessment of the current global macro situation?

The problems in Europe are not finished. They are far from it. At the moment, we are in a lull period, given that a lot of money has been channelled into the banking sector. The real pain in terms of economic growth is yet to come.

When that comes, partly through the austerity programmes, there is going to be recession in Europe. And, a lot of corporates won't be able to meet their financial obligations. Bad debts in the banking system are going to rise.

The big surprise will be that it won't just be the government which will have problems, but also the private sector, which has a much bigger debt-to-GDP ratio than most governments. The main message is that Europe is going to be in recession and the markets are not reflecting that.

They are too positive. The US looks better, as it is growing at about 2-2.5 per cent, which is below long-term average but a decent performance. In China, economic growth is weak. So. it's a mixed picture. This should be a year where people should be cautious, specially with risky assets.

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Given this backdrop, what do you have to say about the current rally, where most risky assets have moved up substantially?

India has performed well over the last two months. To a large extent, things were oversold through the latter part of 2011. The currency was way oversold at 53 to the dollar.

We were surprised at the equity market rally, but not at the currency rally. With both of them having done really well, we are encouraging clients to take some profit and telling them to be underweight.

Globally, the risk assets are driven by enthusiasm and hope for Europe. I think that hope is misplaced. It is time for those who have participated in the risky assets rally to take money off the table.

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Where is the abundant liquidity coming into the markets from?

In India, the changes to non-resident Indian deposit rates have been a huge attraction. The currency and market in India was quite clearly oversold, especially at the start of the year, which has attracted a lot of new capital.

While re-balancing their portfolios, asset allocation committees look for markets which have performed badly and those which have performed well. Then they assess whether it is justified. It doesn't take a lot of foreign money to make a market like India move quickly. We have seen asset re-balancing happen in January.

The Indian market will now have to keep moving up steadily to attract more asset allocation. If it starts to trade sideways, we could say we have seen the best in terms of money and inflows.

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How are you reading India's macro situation at the moment? What are the key things you would like to see in the Budget?

GDP growth is likely to be about seven per cent this financial year. We think next financial year will be slow again, partly because of momentum in the investment side and partly because we expect Europe to be very bad.

We expect China's demand to slow down as well. Assuming   the Reserve Bank of India cuts interest rates during the course of the year, our GDP growth forecast for India is around four to six per cent for financial year 2012-13.

If the government gets its act together and behaves sensibly, on the fiscal side six to seven per cent would be our forecast. However, we are still worried about the fiscal position and the government's ability to address that.

It would be good if the government gives a clear roadmap for introduction of the Goods and Services Tax and the Direct Taxes Code. We would like to see a disinvestment commitment as well. One can't hope for everything, but less populous policies would be a major step forward.

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What is your view on the Indian market for the next year? Which global markets look attractive this juncture?

I think the market in India is kind of range-bound at the moment. On a 12- to 18-month growth outlook, we are telling our clients that 16,000 is a buy on the Sensex and 19,000 is looking stretched.

I think a lot of markets are range-bound and not all look appealing. Within Asia, the Philippines has been badly neglected and is beginning to look a lot more attractive. Taiwan, hit by political and natural disasters in the last couple of years, looks cheap.

We continue to like the yen as a currency, purely because the Japanese don't print much money.