HSBC says investor sentiment near level consistent with 'Sell' signal

The most recent reading on US factory sector activity suggested an acceleration in economic activity was underway, HSBC said, but at a price - an interest rate hike from the US Federal Reserve in March.

A rise in the Institute for Supply Management's manufacturing sector gauge to 57.7 - its sixth successive upside surprise - was a positive for companies' earnings per share, but the looming rate hike would weigh on equities' valuation multiples, strategists Ben Laidler and Daniel Grosvenor told clients.

Historically, price-to-earnings multiples had shrunk by 8% during Fed tightening cycles.

"We believe this trade-off will limit US equity returns this year, with the earnings cycle already extended and valuation multiples at their highest level outside of the tech bubble."

Within that context, they highlighted how Italian stocks had outperformed all of the rest last week, rising by 3%, as global equities were broadly flat, increasingly 'bullish' sentiment among investors and investor flows out of Emerging Market stocks.

As regarded sentiment, HSBC said its aggregate sentiment index had come within touching distance of levels which in the past had sent a 'Sell' signal.

"This bullishness is reflected in fund flows with equity funds experiencing net inflows for nine consecutive weeks. In addition, the VIX remains well below its average levels and not far from its all-time lows," the strategists said.

On EM, they made the 'contrarian' case for the asset class over Europe. The former class, they said, was cheaper, with more depressed margins and better policy flexibility.

In their opinion, risks were also overdone.