Investing.com - The equity market rally continued in the first quarter despite a more hawkish interest rate outlook, but it is now faltering, according to HSBC, adopting a more defensive stance with its sector weightings.
Equity markets, it seems, are only just beginning to take note of the fact that the outlook for interest rate cuts has changed substantially from that at the start of the year, analysts at the U.K.-based bank said, in a note dated April 26.
“When we adopted a more defensive stance with our sector weightings earlier this year … our rationale was that market expectations for policy interest rate cuts were too optimistic and this would be negative for equity markets. It has taken longer than expected for signs of the latter,” the bank said.
Investors have to navigate two potentially opposing forces, the analysts said. On the one hand there is a realistic prospect of a strengthening economic recovery in Europe and global PMI data are also healthier. On the other hand, with major wars in Ukraine and the Middle East, the risk of additional geopolitical shocks remains high.
Consensus EPS growth forecasts for the FTSE Europe index in 2024 continue to fall. This bank’s analysis shows that PE multiple expansion explains the totality of the recent market rally.
“The hope factor is arguably even higher when one considers a lot hinges on a strong EPS recovery in H2. Travelling hopefully may be better than arriving,” HSBC said.
As a result, the bank has upgraded its stance on the more defensive sectors Industrials and Basic Materials in Europe to ‘overweight’ from ‘neutral’, and Energy to ‘neutral’ from underweight’.
On the flip side, it has downgraded Technology to ‘neutral’ from ‘overweight’.
Looking at the U.K., HSBC raised Basic Resources and Chemicals to ‘overweight’ from ‘underweight’ and Energy to ‘neutral’ from ‘underweight’. It also cuts Technology and Retail to ‘neutral’ from ‘overweight.’