>GLOBAL EQUITY STRATEGY (HSBC)

Stressed out

■ US bank stress tests and the bears: not in the same book

■ US Q1 earnings update: non-financials down 30% so far

■ A setback is overdue but could be modest: stay pro-market

At Friday’s close, equities were showing a small gain for 2009, and were the best-performing asset year-to-date, comfortably ahead of government bonds and just nosing ahead of corporates (with high-risk equities ahead of high-risk credit).

Some pundits seem to be taking this as a personal insult. But as we see it, if the banking system is not bust (and the SCAP claims it isn’t), and the world is not facing another Depression, it would have been more surprising had the equity market not bounced sharply since 9 March, when both risks loomed large. The S&P is still down 41% from its high, and 22% since Lehman collapsed, and stocks have still seen their worst-ever decade of relative performance.

So again, we keep an open mind about the 3-6 month outlook, and stay pro-market and probeta. A setback (seasonal and/or technical) seems overdue, but we think it may be modest in scale and duration, and we’re not positioning ourselves for it. It was the rally’s starting point, not the current level, that looked most remarkable to us. And if risk appetite really does rebound, then the riskiest assets may of course outperform further in H2.

Regionally, our overweights are Continental Europe and the GEMs bloc, and our underweight is the US. Sectorally, we stay overweight European and US financials, a selection of cyclical sectors (including mining, construction and building materials and Continental general industrials) and oil. We still avoid utilities, and some consumer-facing areas.

To see full report: GLOBAL EQUITY STRATEGY