HSBC: Go to Cash

The blokes at HSBC are not impressed. They view the current drawdown as unimpressive and do not believe economic conditions on the ground warrant you assholes to step into stocks after a 20% mind numbing melt up.

As such, they recommend that you insert yourself as a singular brick into the wall of worry.

“Cash is king in a world with [debt] overhangs,” the team, led by Global Head of Asset Allocation Fredrik Nerbrand, said in a note published late on Thursday. “While markets have stabilized following the January sell-off, we find limited reasons to add to equity risk. We prefer to have allocations to high-yield and emerging market debt where risk premia are more appealing.”

“Unless corporate earnings start to turn up, there is very limited upside for economically sensitive assets such as equities,” HSBC writes.

Still lofty valuations
While valuations have certainly become a bit more attractive over the course of the downturn, HSBC points out that it is still hard to snap up market bargains. The team is skeptical, however, about how much of a factor valuations have been or will be in the future: “The current drawdown is hardly spectacular. Nor were valuations a reason for the sell-off or a reason why markets should stabilize at this point.”

Taking all this into account, HSBC has updated its asset allocation model, increasing its cash holdings by 11 percentage points, to 17 percent, in their six-month tactical portfolio while decreasing its allocation to German and Swedish bonds, where yields “have now dropped to levels that offer limited scope for future returns.” Meanwhile, the team is cutting its losses on Chinese equities, noting simply that the position “has not performed in line with … expectations.”

“Economic trends continue to drag lower,” the team said. “This implies further risks to corporate earnings and overall investor sentiment. A slow growth outlook also increases the possibility of greater perception of political risks. We can see that correlations between periphery bonds and equity markets have increased. This implies that markets are once again more concerned about sovereign debt overhang.”

Here is the actual report.