Gerard Lyons, global head of strategy and economics at Standard Chartered, in an interview to CNBC-TV18, gave his views on how the global markets will perform going forward.

Lyons said that the global equity market is in a bear phase and there is a major downside risk in global equities. However, he feels that emerging markets like India are likely to outperform developed markets as there will be renewed flows into emerging markets in the next year. We see positive opportunities in India in the long-term, added Lyons.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: We had a powerful rally on global markets these last few days, but how much downside risk do you still see for global equities?

A: There is a significant downside risk in global equities and the downside risk will only be fully sorted and addressed when the problems in the euro area and growth prospects in the West will improve. In India and across the emerging world, monetary policy tightening is likely to be put on hold given the problems in the West, so that can always allow a relief rally. It is important to say that last year; the world economy grew by over 5%, which was a very strong pace of growth. So, even though there is a slowdown in the West, there is a possibility of growth in many markets.

So when one looks at equities, its important to stress that companies with good balance sheets in the West and in India, will still have positive factors working in favour of them. So again its important to differentiate.

Q: How have you read the moves on the dollar index since it has led to the collapse in commodities?

A: The dollar is benefiting from its safe haven status. There has been a slight shift from anti-inflation strategy to pro-growth strategy in the emerging markets. More importantly, the difficulty in which the euro area finds itself, has reinforced the need for international investors to find a save haven. The depth and breadth, and the liquidity of US financial market instruments, is making the dollar more attractive.

Q: What would you look to buy within the equity space? You would prefer buying in emerging markets or developed markets?

A: In the emerging markets because the economic growth prospects are better in these markets than the developed markets. However, it is important to take on board what the financial markets and the Western markets have already discounted. We should not only watch the economic data, but should also see where the flows go to. As we move into the next calendar year, I expect to see renewed flows into the emerging market economies, which would create difficulties as well as opportunities.

The opportunity is of course for those markets, in which international investors invest. However, the challenge is that many emerging economies cant cope with the likely increase of capital flows into their own markets. They dont have the absorptive capacity; they cannot absorb the money that is likely to come in. Nonetheless, one should see the emerging markets outperforming. In India, the RBI is likely to do monetary tightening again to keep inflation pressures in check.

Q: Do you think global markets are still in the bear phase?

A: Global equity markets are in the bear phase. Global bond markets are in a good phase and there are other investments such as infrastructure bonds, which seem to be in good shape. It is important to stress that this is still the same crisis that began three to four years back.

We have had an economic recovery, but we are facing a more challenging near-term economic outlook. It is true that there are greater challenges in the West, while better opportunities in the East. However, it is crucial for investors to look at equity market prospects in the context of economic fundamentals, policy and confidence. When I look at India, I see some near-term challenges, but also some long-term positive opportunities.