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Risk Back On; Expect 10-15% Stock Gains in October: Pro

Stock markets are due for a relief rally, says Arjuna Mahendran, Managing Director & Head Investment Strategy Asia at HSBC Private Bank, who expects a 10-15 percent rebound in global equities in October.

He says markets have priced in a “risk-on, risk-off” environment, and after August’s massive selloff, investors are starting to creep back in.

“You'll have risk-off periods like we've seen in the last two months, where basically all bets are off, everybody hunkers down, very defensive, hunt for yield, look for high-yield equities, high-yield bonds,” Mahendran told CNBC on Wednesday.

"Now you're getting equities in Europe that are giving you yields of 7, 8 percent dividend. You'll have to grab those, because you're not going to get another opportunity to buy those," he added.

His comments come even as global markets remain on edge over Europe’s debt crisis, which he believes will see some form of resolution by this week.

“Everybody knows that the Germans and the rest of Europe have the wherewithal to keep this thing running until 2013. It's just a question of politics, and once the politics have been resolved — it won't be resolved entirely — but it will, you know, have bits and pieces coming out from time to time,” Mahendran said.

"The Europeans realize the gravity of this situation, so (you'll) probably see some form of a band-aid being applied to Greece over the weekend.”

The outlook for the U.S. economy, while challenging, is “nowhere near recession” in his view, and expects upbeat results in corporate America’s upcoming earnings season.

“Everybody is waiting for the October earning season. I don't see any big disappointments there,” he noted.

Also helping lift sentiment is China, he says, which appears to be winning the battle against inflation while keeping growth going.

"China is growing gangbusters... (August) new lending is up (to) 500 billion renminbi; industrial growth 13 percent; fixed asset investment double digit," Mahendran said.

“So, I think investors are going to get back there and start taking a little more risk in October in anticipation of perhaps slightly better markets.”