Volatile year for equities: HSBC

Stability isn't within reach even with the spate of positive news from the US and EU fronts, and Singapore isn't an exception.

There is still room for negative surprises, the bank said in its equity insights report, and that caution should be adopted instead of blind bullishness.

Here's more from HSBC:

It might just be a New Year effect. Often, after a difficult year, when fund managers come back to work in January and find some fresh money to invest, they tend to feel brighter about the prospects for the year ahead. As a result, global equities are up 2% y-t-d. In the past two weeks, as we have done the rounds of investors to explain the thinking in our Q1 Quarterly, Navigating a turbulent world, we have been surprised just how bullish the majority have become. This was particularly true in Europe (where we found German investors to be unanimous in their bullishness); Asia was more mixed.

The logic behind the positivity is that (1) economic data, especially in the US, is picking up, (2) the European Central Bank is doing “back-door QE” by providing unlimited liquidity to banks that they in turn will use to buy European government bonds, and (3) the problems in the Eurozone are slowly being solved and, anyway, are too well understood to present the risk of any further negative surprises. In particular, almost all fund managers we spoke to believe that everyone else is bearish and that therefore any bad news is in the price. Many quoted this as a reason why they were starting to notch up their risk exposure in equities.

Obviously, that suggests the consensus is not as bearish as everyone thinks. And, indeed, sentiment and holdings data bear that out.

Some of the recent developments have admittedly been helpful (the ECB action alleviates the risk that European banks will be unable to refinance maturing debt this year). But we still worry about the risk of a credit crunch if they can’t raise equity. Moreover, our economists believe that the recent strength in US economic data may be due to capex being brought forward into Q4 before the expiry of a tax break; misleading seasonal adjustment may also be a factor (remember the growth spurt at end-2010, too).

Our view remains that this will be a volatile year. True, equity valuations are cheap (although not so cheap that they could not fall further in the event of a risk-event or economic and earnings disappointments). And policymakers will continue to react to offset the worst risks. But the news that France and others had their credit ratings cut and the near-failure of the Greek negotiations should remind investors that risks still lurk. We continue to believe the global equity index is likely to be only flat on the year.