Davies, manager of the HSBC Global Strategy Funds, said that despite investors’ concerns around a US slowdown, negative global growth projections and China, they do not anticipate a global recession – and the recent market sell-off may have presented a buying opportunity for contrarian investors.
“Major recessions tend to be caused by tight money supply, high real oil prices and financial sector stress. These preconditions are not currently present,” said Davies. And while the outlook for global economic growth has weakened, she continued, the key issue is the extent to which it is damaging the corporate sector.
Davies noted that there has been some decline in corporate earnings, but much of it still appears confined to oil and energy. “We think that the current market pricing – which appears pessimistic – may present an opportunity to build equity exposure. “Safe-haven” demand, central bank policy action and recession fears have led to a rally in developed market government bonds, taking valuations to what we believe are very unattractive levels. In this environment, we continue to favour equities and corporate bonds and remain cautious on developed market government bonds,” she added.
With regards to equities, HSBC is positive on Europe ex UK and Japan, whose stocks remain supported by stronger corporate governance and increased net profit margins. Eurozone equities should see support from the ECB’s substantial QE programme and the ongoing economic recovery, she noted. “We expect to see higher earnings per share and further depreciation of the yen, driven to a large extent by the Bank of Japan’s extremely loose monetary policy,” said Davies.
Meanwhile, HSBC deems UK valuations as having become less attractive over time due to the upcoming referendum on membership of the EU, in addition to potential rising interest rates, which could inject additional market volatility between 2015 and 2017.
