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Monday 15 March 2010
HSBC says warning signs of coming general correction are unmistakable
Global financial markets are yet to bottom and investors should hold cash, investment-grade debt or defensive stocks to ride out a coming “general correction”, according to HSBC Holdings.
HSBC says warning signs of coming general correction are unmistakable
Nick Gentle, Bloomberg 14 March 2010
Global financial markets are yet to bottom and investors should hold cash, investment-grade debt or defensive stocks to ride out a coming “general correction”, according to HSBC Holdings.
A sputtering US recovery, the winding back of stimulus in Asia and the likelihood that Europe will begin to “normalise” interest rates mean markets have not fallen far enough, says Dilip Shahani, HSBC’s head of global research, Asia-Pacific.
Greece’s woes have shaken global markets, and a survey shows confidence in the world economy fell for a second month in March.
“Equity and credit markets, and foreign exchange and interest rates, have probably discounted about 60per cent of what’s happening,” he said. “But there’s probably one or two things that are going to come and create the final surprise that will trigger the final push down on all the markets together.”
HSBC predicts the extra yield investors demand to hold investment-grade Asian dollar bonds rather than US treasuries will increase less than the premium commanded by the region’s high-yield notes.
The spread on HSBC’s Asian Dollar Bond Index, which tracks investment-grade issues, will widen to 350 basis points by the end of June from around 283 now, while that for the bank’s Asian High-Yield Corporate Bond Index will move to 750 basis points from 594, says a report. Investors should buy once the correction materialises because spreads will narrow again by the end of the year, the lender advises.
“The arguments against a general correction are getting harder and harder to ignore,” Shahani said. “Hold cash or high-quality bonds. Even if you have to be in equity, hold defensives or utilities. They will still go down but it won’t be by as much.”
Shahani’s team in a December report forecast investors would realise by this month the US recovery was “of poor quality, of less intensity, and most disturbingly, still requiring heavy fiscal and monetary stimulus”.
Federal Reserve chairman Ben Bernanke told Congress on February 25 that the US economic recovery was still “nascent” and likely to require “exceptionally low” interest rates for an extended time.
The case is building for an interest rate increase on the mainland. Inflation accelerated to a 16-month high of 2.7 per cent in February and real estate prices in 70 cities climbed at the fastest pace in almost two years. Inflation was also gathering pace in Europe’s largest economies, increasing the likelihood that the European Central Bank will raise interest rates, HSBC said.
“All these things have come earlier than expected so people have been caught out being overweight,” Shahani said.
“What is telling is that volumes are starting to drop off in the equity markets and also in the credit markets. There are more and more people standing on the sidelines and that makes the market more susceptible to shocks.”
Rising volatility amid declining volumes and continued macroeconomic risks undermine current market levels, heightening the chance that long positions will be “taken out”, Shahani said.
“You just need a few people to decide to get out and then it drops to a new level,” Shahani said. “And then the real money, the wall of money that everyone talks about will come in and lift it back up. But clearly this is not that level.”
1 comment:
HSBC says warning signs of coming general correction are unmistakable
Nick Gentle, Bloomberg
14 March 2010
Global financial markets are yet to bottom and investors should hold cash, investment-grade debt or defensive stocks to ride out a coming “general correction”, according to HSBC Holdings.
A sputtering US recovery, the winding back of stimulus in Asia and the likelihood that Europe will begin to “normalise” interest rates mean markets have not fallen far enough, says Dilip Shahani, HSBC’s head of global research, Asia-Pacific.
Greece’s woes have shaken global markets, and a survey shows confidence in the world economy fell for a second month in March.
“Equity and credit markets, and foreign exchange and interest rates, have probably discounted about 60per cent of what’s happening,” he said. “But there’s probably one or two things that are going to come and create the final surprise that will trigger the final push down on all the markets together.”
HSBC predicts the extra yield investors demand to hold investment-grade Asian dollar bonds rather than US treasuries will increase less than the premium commanded by the region’s high-yield notes.
The spread on HSBC’s Asian Dollar Bond Index, which tracks investment-grade issues, will widen to 350 basis points by the end of June from around 283 now, while that for the bank’s Asian High-Yield Corporate Bond Index will move to 750 basis points from 594, says a report. Investors should buy once the correction materialises because spreads will narrow again by the end of the year, the lender advises.
“The arguments against a general correction are getting harder and harder to ignore,” Shahani said. “Hold cash or high-quality bonds. Even if you have to be in equity, hold defensives or utilities. They will still go down but it won’t be by as much.”
Shahani’s team in a December report forecast investors would realise by this month the US recovery was “of poor quality, of less intensity, and most disturbingly, still requiring heavy fiscal and monetary stimulus”.
Federal Reserve chairman Ben Bernanke told Congress on February 25 that the US economic recovery was still “nascent” and likely to require “exceptionally low” interest rates for an extended time.
The case is building for an interest rate increase on the mainland. Inflation accelerated to a 16-month high of 2.7 per cent in February and real estate prices in 70 cities climbed at the fastest pace in almost two years. Inflation was also gathering pace in Europe’s largest economies, increasing the likelihood that the European Central Bank will raise interest rates, HSBC said.
“All these things have come earlier than expected so people have been caught out being overweight,” Shahani said.
“What is telling is that volumes are starting to drop off in the equity markets and also in the credit markets. There are more and more people standing on the sidelines and that makes the market more susceptible to shocks.”
Rising volatility amid declining volumes and continued macroeconomic risks undermine current market levels, heightening the chance that long positions will be “taken out”, Shahani said.
“You just need a few people to decide to get out and then it drops to a new level,” Shahani said. “And then the real money, the wall of money that everyone talks about will come in and lift it back up. But clearly this is not that level.”
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