HSBC analysts "constructive" but warn equities may face tough 2023

(Alliance News) - HSBC predicted a somewhat better year for European equities in 2023 than what 2022 offered, though the bank warned that investors should temper expectations, despite attractive valuations.

HSBC, in an equity trading strategy research note, acknowledged that it is "more constructive on the outlook for 2023".

However, next year does still bring "risks of further equity market corrections".

"After a sharp market correction this year, it is tempting for investors to listen to the siren voices of imminent market recovery. However, we still see significant risks for equity markets. Central banks' resolve to tame inflation should not be underestimated; this could lead to higher policy rates for longer. Financial accidents are also still possible in our view and with recession only beginning to bite in some economies the extent, duration and damage remain uncertain," HSBC analysts commented.

HSBC noted that major stock market benchmarks in Europe and the US fell by around 15% to 20% in the first half of 2022. They have recovered some 5% to 8% in the second, however.

"The catalyst for this upward move was a lower-than-expected US CPI number for October which sparked a powerful rally in equity markers on both sides of the Atlantic on 10 November. It is a single data point. Speculation is growing that monetary tightening is nearing its peak amid signs of slowing goods inflation, the easing of supply chain bottlenecks and faltering economic growth," HSBC explained.

Despite a bounce, the bank noted "valuation multiples in Europe and especially in the UK look unquestionably cheap".

HSBC cautioned, however: "However, we still see many risks in the near term and it is entirely possible that markets will fall further before they start to improve. At a most basic level, our analysis of big market corrections since 1929, admittedly in the US, suggests that the c25% drop to date in the S&P 500 is modest. A fall of 40% is about average. Our own diffusion index also suggests that the contraction cycle still has further to run."

A deeper-than-expected economic downturn provides a risk to equity markets. A tough winter for Europe could also deepen power woes, hitting market sentiment.

On the flip-side, an easing of gas supply issues and peace in Europe could lift markets next year.

HSBC added: "Peace in Ukraine would prove positive for markets, though it may not bring about any short-term change in the shortage of gas supplies given that Europe is unlikely, in our view, to resume buying from Russia in the near future. A relaxation of COVID-19 measures could provide a powerful catalyst for global economic recovery. Likewise, a shallow recession and a faster-than- expected decline in the headline rate of inflation could stimulate equity markets."

By Eric Cunha; [email protected]

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