(Marketwatch) Willem Sels, global chief market strategist at HSBC Private Banking in Geneva, agreed that commentators are getting enthusiastic, but he said other indicators of market sentiment aren’t so one-way, apart from the put-call ratio.
“Speculators still have decent amounts of gold positions, they still have very high elements of Treasury positions, so I think the risk appetite is a little bit mixed,” he said.
Sels said the bank is overweight equities. “It is quite healthy for a market to rally on broadening support,” Sels said. “We don’t know the exact timing, but we know the direction of travel. And we do know that six months or 12 months from now, the economy will be bigger than it is currently, profits will be bigger than they are currently,” Sels said. Sels said HSBC also is confident that this expansion will happen in an environment of low interest rates, and that 10-year Treasury yields will remain below 1%.
Why will bond yields remain so anchored? On the front end, of course, the Federal Reserve has pledged not to lift interest rates until inflation is averaging 2%. Furthermore, the only way governments will be able to grow their way out of the huge debt burden they have taken is with low interest rates, so central banks will have an incentive to keep buying bonds to keep financial market stability, he said. There also are structural factors, such as global supply chains keeping labor pressures in check, and global aging, and the savings surplus in emerging markets needing an outlet.
Sels said there is no reason to rotate away from technology stocks that have performed so well. “There is no real threat coming from the fixed income space for growth stocks,” he said. Plus, the structural case for technology isn’t behind us. “We continue to have this whole digital revolution which continues to create superior growth,” he said. HSBC doesn’t mention companies by name, but he said investors should diversify out of the five top U.S. technology names — Apple, Microsoft, Amazon, Facebook and Alphabet comprise nearly 25% of the S&P 500. “You can achieve some of that growth without the headliners and without the very high valuations of the top five.”
HSBC is optimistic about cyclical stocks, including those in the industrial and materials space that do well in the early parts of economic cycles. But he cautioned not to just buy any stock in these sectors. “There is a temptation that cyclical stocks mean that you should be going into low quality. We do not agree with that,” he said. Even in the reopening process, the ability for companies to generate earnings and cash flow, and the health of their balance sheets, will be important.
He stressed diversity in asset allocation not just on the equities side but in fixed income, where HSBC is overweight emerging markets. “I think it’s very important to not just think of the fixed income space as the safe-haven Treasuries, but to really diversify into all of the different blocks,” he said. “You have the central banks having your backs on the credit side, with emerging markets, it won’t eliminate all the volatility, but you know you’re investing with central banks continuing to do that, and it will give you a lot of confidence,” he said.
