Most of Wall Street expects further declines in equities in the first half of 2023. This is making HSBC Bank Plc strategist Max Kettner turn more optimistic.
(Bloomberg) — Most of Wall Street expects further declines in equities in the first half of 2023. This is making HSBC Bank Plc strategist Max Kettner turn more optimistic.
After maintaining a “maximum underweight” position in stocks since August, the strategist raised the asset class to neutral, citing a “very strong” consensus around a recession and weak first-half for risk assets, signs of easing inflation, resilient economic growth, a reopening in China and the absence of a gas crisis in Europe.
“We are now dipping our toes in,” Kettner wrote in a note dated Jan. 9. “Given almost all of the factors to turn more constructive have indeed turned, the sequencing of a weak first half for risk assets no longer makes sense to us.”
The strategist’s view is in stark contrast to most of his counterparts, including Michael Wilson at Morgan Stanley and Mislav Matejka at JPMorgan Chase & Co., who have all warned that the specter of recession will likely compound the worst annual slump for stocks since 2008, before a recovery in the second half of 2023. Money managers have also braced for a stunted rebound, saying gains will be concentrated in the last six months.
Kettner’s view is underpinned in part by the extent of the bearish positioning among investors. He said expectations for both economic growth and corporate earnings are pessimistic for the near term, making it “hard to see significant downside surprises.” He also expects inflation to cool faster than consensus forecasts, accompanied by an improvement in consumer sentiment.
US stocks rallied sharply last week as signs of easing price pressures fueled bets that the Federal Reserve could further slow the pace of rate hikes. Still, some of that optimism has been tempered this week following hawkish comments by two central bank officials. US stock futures edged lower on Tuesday as investors await remarks by Fed Chair Jerome Powell later in the day.
Meanwhile, Kettner said the outlook for stocks is gloomy in the second half as earnings expectations prove “much more challenging to beat.” “This is likely the point where proper risk-off will take hold, with overweight positions in developed market sovereigns and defensives versus cyclicals in equities,” he wrote.
The strategist retained a preference for value stocks over growth, although he said the latter “could make a stronger comeback” later in the first half if inflation cools more decisively.
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