Despite some recovery in the world’s stock markets following a volatile start to Y 2016, strategists at HSBC Holdings (NYSE:HSBC) urge caution when attempting to buy a dip in stocks.
“Cash is King in a world with debt overhangs,” the HSBC Team, led by Global Head of Asset Allocation Fredrik Nerbrand, said in a note published late Thursday.
“While markets have stabilized following the January sell-off, we find limited reasons to add to equity risk. We prefer to have allocations to high-yield and emerging market debt where risk premia are more appealing.”
There’s been a lot of talk about a profit recession over the past few months, and HSBC does not think that talk is going to end soon. Without more of a reason to be optimistic about earnings, there is little cause to be Bullish on stocks, Caution.
“Unless corporate earnings start to turn up, there is very limited upside for economically sensitive assets such as equities,” HSBC writes.
Ok, valuations have become a bit more attractive over the course of the downturn, it is hard to snap up market bargains.
The HSBC Team is skeptical in how much of a factor valuations have been or will be in the future: “The current draw-down is hardly spectacular. Nor were valuations a reason for the sell-off or a reason why markets should stabilize at this point.”
That position established, HSBC has updated its asset allocation model, increasing its cash holdings by 11 to 17% in their 6-month tactical portfolio, while decreasing its allocation to German and Swedish bonds, where yields have “have now dropped to levels that offer limited scope for future returns.”
The HSBC Team is cutting its losses on Chinese equities, noting simply that the position “has not performed in line with … expectations.”
“Economic trends continue to drag lower,” the Team said. “This implies further risks to corporate earnings and overall investor sentiment. A slow growth outlook also increases the possibility of greater perception of political risks. We can see that correlations between periphery bonds and equity markets have increased. This implies that markets are once again more concerned about sovereign debt overhang.”
HSBC’s note follows cautious calls by other Wall Street firms including Citigroup Inc. (NYSE:C), which said the odds of a global recession continue to increase.
Analysts at JPMorgan Chase & Co. (NYSE:JPM) recommended Thursday that participants use the recent rebound to sell stocks. They also cited a worsening outlook for economic growth, corporate earnings and the looming risk of recession.
Friday, US major stock market indexes finished at: DJIA +62.87 at 17006.77, NAS Comp +9.60 at 4717.02, S&P 500 +6.59 at 1999.99
Volume: trade was heavy as more than 1.35-B/shares exchanged on the NYSE
Note: Friday afternoon dive that cut the market’s gain in half occurred near the 100-Day MA at 1999.8 in the S&P 500 as the index tried to register its 1st close above that mark Key resistance mark since 31 December 2015. The benchmark average settled just above that mark after bouncing off its 50-Day MA at 1940.5 Tuesday, hence the Caution note from HSBC.
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HSBC Says 'Cash Is King' in a world of debt overhangs
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