HSBC ups UK and EM stocks, downgrades Switzerland and Japan

HSBC made some significant changes to its country recommendations in its latest global equity strategy report, saying fundamentals have deteriorated.

The bank said nothing has changed in the first quarter on the face of it, with global stocks roughly flat and investor sentiment at average levels.

“However, this masks the historically significant 24pp global equity round-trip that investors have endured, which has been spurred by acute concerns over global growth and a potential misstep by the Fed. While these fears have eased, the fundamentals have deteriorated.”

HSBC upgraded its stance on emerging markets to moderately ‘overweight’ from ‘neutral’. It said a weaker dollar and heavy under-ownership have sown the seeds of a relief rally after five years of underperformance, which may have further to run.

“We are not making a meaningful call on the cycle, but we believe a stabilising Chinese economy and global business cycle would provide a gradual fundamental ramp for EM stocks to continue to strengthen, as margins move off of very depressed levels,” the bank said.

HSBC’s country positioning is cyclical, with a focus on China, Russia, Brazil, and Turkey.

The bank lifted its MSCI EM price target to 900, implying a further 10% upside to year-end.

HSBC increased its ‘underweight’ in US equities, cutting its end-2016 target on the S&P 500 to 2,050 from 2,100.

It said while the US continues to be viewed globally as the relative “safe haven” for now, medium-term headwinds are building.

“Earnings are high, valuations full, investor positioning significant, and buyback and tax supports easing."

The bank kept Europe ex UK at ‘overweight’, arguing the region offers the best earnings story from a global perspective, although it has been disappointing so far. “We see a robust business cycle, policy support, and investor under-ownership.”

It upgraded the UK to ‘neutral’ from ‘underweight’ following five years of underperformance, noting earnings have started to recover, the currency is supportive, the index composition is cyclical and the dividend yield is above average.

“This balances in our view any referendum volatility.”

HSBC cut Switzerland to ‘neutral’ from ‘overweight’, given weak earnings momentum, high relative valuations, and high investor holdings.

It cut Japan to ‘underweight’ from ‘neutral’, highlighting yen strength and lacklustre GDP against all-time high margins, high consensus earnings growth expectations and improving sell-side optimism.

The bank kept its sector allocations broadly unchanged, remaining ‘overweight’ utilities, consumer staples and energy.

HSBC is ‘underweight’ healthcare, IT, and consumer discretionary, but cut industrials to ‘neutral’ from ‘overweight’.