HSBC ups Japanese equities to 'neutral', stays 'underweight' Europe

HSBC upped its stance Japanese equities in its latest equity strategy note, but remained cautious on Europe as it made a series of changes to its sector recommendations.

The bank said global stocks reacted surprisingly well to the US election results, with investors betting that Donald Trump will be a more moderate president than candidate and assuming potential for fiscal stimulus to drive growth.

Cyclicals and financials have paced the advance, alongside rising bond yields a steeper curve and a stronger dollar.

However, HSBC reckons equities are unlikely to push much higher. “Trump’s victory may mark a significant departure from current economic policy and will add to uncertainty, which is already at historically high levels globally. This uncertainty is against a backdrop of high valuation multiples, optimistic earnings growth expectations, full profit margins, and far from bearish investor sentiment.”

It lifted Japan to ‘neutral’ from ‘underweight’, saying its new weaker yen forecast relieves some earnings pressure, economic activity is showing signs of bottoming and the market has traditionally been a relative safe haven.

The bank remained ‘underweight’ Europe ex UK “as worries refocus on the heavy political calendar, the relative lack of economic policy flexibility, and the need for a positive earnings surprise”.

HSBC maintained its ‘overweight’ stance on the US and emerging markets. It said the US was a relative safe haven and its earnings growth concerns are being replaced by valuation fears to a more hawkish Fed.

“US small caps are an interesting hedge, as they are high beta, short duration, relatively cheap, and cyclically heavy.

“Recent emerging market equities weakness was almost the only thing not surprising about the Trump election aftermath, but this represents a buying opportunity. Investors are cautious and valuations cheap.”

In terms of sectors, the bank upped its stance on global autos, banks, capital goods, and global diversified financials to ‘neutral’ from ‘underweight’.

It downgraded the media sector, pharmaceuticals and consumer services to ‘underweight’ from ‘neutral’.

As far as pharma is concerned, it said that while the sector bounced back after the Trump win, downward pressure on drug prices will not abate.

HSBC remained ‘overweight’ the commodity sector, which it said will benefit from stronger demand in the near term from EMs and potentially the US, along with ongoing supply discipline.

It also kept utilities at ‘overweight’, saying it’s the one defensive sector that it still well placed with above-average fundamental dynamics.