>RELUCTANT BUYERS (HSBC)

■ Our marketing trip suggested many investors remain bears
■ …but have been buying against their better judgement
■That probably explains the sharp sell-off in the past few days

Since our Quarterly was published on October 6, we have been around Asia and Europe exchanging views with clients. In three weeks, we have seen almost 70 institutions in six countries (and next week we will be in the US). The mood among investors varies greatly from one location to another. We found most CIOs in London shared our view that the current environment is positive for equities, with growth likely to surprise on the upside but interest rates to remain low. In Hong Kong and Singapore, views were split 50:50 between those who agreed with us and those who believe the global economy will double dip. But in much of Europe – particularly Switzerland, Scotland and Paris – we found deep bearishness and focus on the structural problems in the world economy. But even the bears recognised the strength of the recent momentum and have become reluctant buyers.

That goes a long way to explain the sell-off of the past few days. After global equities rose 70% in six months (and emerging equities 106%), as shown in Chart 1, many fund managers who had bought into equities against their better instincts were itching to find an excuse to take profits. A few weaker data points in the US, the first stirrings of central bank tightening and the end of the Q3 earnings season were enough to give them that.

We are happy to stick with our view that the upgrade cycle is likely to continue. Even after the much better than expected earnings season, analysts’ expectations for next year remain too cautious. Valuations are not stretched (see Chart 2). Cash levels are still high, and retail investors continue to buy bonds rather than equities. The easiest part of the rally is over, but we still see upside over the next six to nine months.

To read the full report: EQUITY INSIGHTS