Volatility fatigue? Five themes to outperform
How to play the yield
Timing the peak in bond yields is likely to be the major decision facing investors in terms of their sector allocations in 2017. Our bond strategists see the scene setting US 10Y bond yield peaking at the end of Q1. We focus on the rise before the fall and stay overweight the European Financials.
Still value in value
Our Fixed Income team’s base case is for bond yields to peak at the end of Q1. Even though the expected rise is modest from here, it points to a continued preference for Value over Growth. Our two new monitoring tools – V-meter and G-meter – attempt to quantify whether the latest period of Value outperformance and Growth underperformance has further to run. Analysis of our Value screen indicates that market optimism remains relatively low on this theme even though momentum is at multi-year highs. The opposite is true for our Growth screen.
Run with the Banks
We maintain our non-consensus overweight recommendation on European Banks. Even after the strong run we do not think it is too late to buy the sector. This sector is offering more visibility than many currently in our view, given both the steeper yield curve and a fading regulatory headwind.
The great thaw of China
Our updated Chinometer tells us that market optimism on the China theme continues to edge higher from the record low it reached in January. Meanwhile, short-term momentum indicator has risen to a six year high. Given that momentum tends to lead market optimism and supports the view that sentiment on the sectors and stocks exposed to China have further upside.
Value Income Perspective screen (VIPs)
The rise in bond yields has triggered a de-rating in dividend proxy stocks. We feel the best way to play higher yield in the current environment is through stocks that also offer Value and/or a degree of sensitivity to the global business cycle. Our Value Income Perspective screen (VIPs ) screen lists 22 stocks that HSBC analysts have Buy ratings on.