(Bloomberg) - HSBC Bank Plc’s Max Kettner sees a painful end to this summer’s rally, and recommends abandoning equities and government bonds and hiding in cash on mounting risks to economic growth.
“Market pricing of risk assets is now very much out of line with our cyclical growth indicators,” HSBC strategists led by Kettner said in a note on Thursday, adding that both bonds and stocks could come under renewed pressure.
The strategy team at HSBC is moving to a “maximum underweight” across equities, high-yield credit and developed-market sovereign debt, and said “the only asset of choice” in the current environment is cash positions in US dollars. Within stocks, Kettner prefers value to growth, is underweight US equities the most among regions, and would look to buy developed-market government debt once valuation levels are more attractive.
US equities posted their best month since 2020 in July after bond yields retreated as investors were reassured by robust earnings and bets that the Federal Reserve will slow the pace of interest rate hikes. The tech-heavy Nasdaq 100 has rallied almost 20% from the June depths of bear market, and the rebound’s continuation hinges on the outlook for the Fed’s policy, where officials pledged to continue aggressive fight to cool inflation.
But HSBC strategists say expectations that economic growth will stabilize and inflation will fall significantly are “wishful thinking.”
“From a fundamental perspective, it’s only got worse,” they said. “Our cyclical growth indicators almost all point to significantly more downside in growth momentum.”
Kettner has been a staunch bear this year, correctly predicting a lose-lose situation for risk assets at the start of 2022, forecasting meager returns for equities in the first half amid a combination of decelerating growth and monetary tightening.
HSBC strategists are joined by peers at Goldman Sachs Group Inc. and Sanford C. Bernstein who warn the recent brisk rebound in equity markets won’t last as the macroeconomic data continue to deteriorate and earnings forecasts are being slashed.