Europe Economy

Stocks Set for Gains as Earnings Begin: HSBC Analysts

Alcoa kicks off the second-quarter earnings season Monday after the bell and analysts at HSBC believe now is a good time to buy stocks ahead of a rebound some time in the third quarter.

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“With earnings growth robust, valuations cheap and equities under-owned, we see a rebound beginning sometime in Q3. We advise raising equity risk gradually over the coming months, and expect the world index to rise 7 percent by year-end,” Garry Evans, the global head of equity strategy at HSBC, said in a research note.

With a number of event risks like the Greek debt crisis and talks over the US debt ceiling still hanging over stocks, Evans said that investors willing to take a long-term view will make money in stocks.

“The consensus forecast for global earnings growth is 17 percent for this year and 14 percent next – and those expectations have been steadily ratcheted up over the past months. Neither are those forecasts unrealistic, either relative to historical trends or to our economists’ forecasts of economic growth,” he wrote.

At the same time, "valuations are very low: the global index has been cheaper than it is now only four percent of the time since 1988. Valuation looks particularly cheap relative to interest rates, which are likely to stay low,” said Evans.

“Equities should rise in line with earnings growth – which, in our view, means 10-15 percent a year. That should be attractive when the yield on cash is zero and government bonds only about three percent.”

As a result the HSBC team are telling investors to take on more risk in their equity portfolios ahead of a bounce in the third quarter.

“We continue to expect emerging markets to outperform developing ones, as inflation fears fade and investors refocus on the secular growth story. We particularly like China, where we think worries of a hard landing are unfounded and where inflation is likely to slow in H2. In the developed market universe, we continue to prefer the US over Europe or Japan,” said Evans.