HSBC strategists indicated that the recent downturn in equity markets is likely a temporary phase. The team, which is taking an optimistic view, is responding to the pullback by increasing their already bullish position on stocks. They have shifted to an overweight stance in both U.S. and Japan equities, and have also upgraded Emerging Market (EM) equities to overweight.
The strategists have extended their bullish sentiment to high-yield (HY) credit, adopting a "max bullish" approach. In addition, they have moved EM hard currency debt to an overweight position. The team's confidence is underpinned by the belief that fundamental and technical trends continue to support the equity markets.
According to the strategists, current sentiment and market positioning do not raise red flags, although they note that real money investors have recently begun to adopt a more constructive outlook on equities. This suggests that institutional investors are seeing potential in the market despite recent declines.
The HSBC team also pointed out that current valuations and momentum are conducive to a continued risk-on approach. They believe that any negative surprises in inflation or economic activity could alleviate concerns about the Federal Reserve's monetary policy, particularly fears that the Fed might not cut interest rates or could potentially increase them this year.
The strategists' assessment hinges on the expectation that a mild downside in economic indicators would prompt a reassessment of the Fed's stance, potentially leading to more accommodative measures. This, in turn, could bolster investor confidence and support a rebound in equity markets.
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