>Equity Insight (HSBC)

Pro-cyclical shift reiterated

■ Near-term hurdles: this week’s data flow and Q1 results
■ But financial and economic crises slowly turning a corner
■ Sticking to more pro-cyclical stance and rally to year-end

After one of the sharpest rallies in recent times, some near-term retracement is hardly surprising. This week’s ISM, PMIs and non-farm payroll data and pending Q1 results will doubtless provide opportunities for profit-taking. The Vix has still to break below 40: what we have called the “volatility bubble” has yet to burst.

Looking further ahead, however, we do think that both the financial and economic crises are (very) slowly turning a corner. The Fed’s latest initiative seems to be pulling mortgage rates down – to 50-year lows in some cases – and refinancing applications up (see chart). Meanwhile, some indicators of US consumer and housing demand seem to be stabilising, and the pace of destocking is likely to fade.

Our US economist expects GDP growth could turn positive in the second quarter (Break in the weather?, 27 March 2009). He still doubts that there will be much follow-through, but we think that equities have not been pricing in even a flat economy so soon.

On 19 March 2009 (Q2 preview: adding to cyclical weights), we shifted our sectoral views a little further in a pro-cyclical direction and away from some defensives (pharmaceuticals and utilities). We also set out the case (again) for some further rally to year-end. Whether it is a “bear market rally” or not seems less important than whether it happens – and we still think it can.

To see full report: EQUITY INSIGHT