Threats to the USD14trn four-year global “Goldilocks” equity rally are real but not to be overdoneWe focus on growth visibility and policy flexibility, and see contrarian opportunities in Europe, China, Energy, and high dividend playsHSBC’s proprietary global sector Radar now onlineGlobal Equity StrategyDon’t throw in the towelEquity StrategyGlobalOctober 2015Disclosures and Disclaimer This report must be read with the disclosures and analystcertifications in the Disclosure appendix, and with the Disclaimer, which forms part of itBy Ben Laidler and the global equity strategy team 1 Equity Strategy Global October 2015 abc Equity sentiment became too bearish in Q3; this was a contrarian buy signal, but fundamentals have changed – somewhat. This seems to threaten both the 30% global equity rally of the last four years that has added USD14trn to global equity market capitalization (World Federation of Exchanges), and its “Goldilocks” supports of moderate GDP growth, low inflation, and easy policy. These risks are real, but easy to overdo. Activity data have deteriorated moderately. Earnings expectations are a touch too high (chart 2). The upcoming Fed rate rise is a risk – primarily to the US, in our view, rather than to global equities more broadly. The rest of the world can perform, as long as policy is not synchronized. Cyclically adjusted equity valuations are back at long-term average levels. We see room for a 4% global equity capital gain into year-end. We remain in a stubbornly low growth world, with rising tail risks given the absence of much further policy flexibility. This focuses our allocations on markets with growth visibility and policy support. We run a more balanced country and sector asset allocation, and have neutralized the business cycle component of our ‘Radar’. We see a number of contrarian opportunities, in Europe, China, Energy, and high yield equities, to name a few. Europe ex UK is our key overweight, with ECB support likely to be extended, and a multi-year earnings upcycle underway. Consensus earnings expectations are some of the highest in the world, and we think they could be double this (chart 3). We prefer Germany, France, and Spain, where sentiment is most depressed. We upgrade Switzerland to overweight from neutral, given its defensive nature and as its fundamentals have stabilized. We remain cautious on the UK. It is well-owned, has a high commodity index-weighting, and stronger pound-constraining earnings momentum. 1. Regional allocations Market ____HSBC call____ Current Previous _____Weight_____ MSCI AC HSBCDiffBlue-chip index current level*Target end-2015 level Target end-2016 level % from currentUS underweight underweight 52.2 49.2-3.0S&P 500 2,0172,060 2,100 4%Canada underweight underweight 3.1 2.1-1.0S&P/TSX 13,96414,200 14,500 4%UK underweight underweight 7.0 6.0-1.0FTSE 1006,3716,500 6,700 5%Switzerland overweight neutral 3.3 5.32.0SMI8,7069,000 9,200 6%Eurozone overweight overweight 10.6 13.63.0EUROSTOXX 503,2473,400 3,550 9%Japan neutral neutral 7.9 7.90.0TOPIX1,5151,550 1,600 6%Australia neutral overweight 2.3 2.30.0S&P/ASX 2005,2675,500 5,600 6%Emerging world neutral overweight 10.0 10.00.0MSCI EM865900 920 6%World MSCI AC405420 435 7%Source: Thomson Reuters Datastream, MSCI, IBES, HSBC The US faces a triple premium of a strong and vulnerable currency, all-time high earnings, and high valuations off this elevated base. It has acted as a defensive, lower-risk market for now, given its relatively domestic and consumer-driven nature and strong share buyback support, and has seen a significant return of investor flows. Earnings expectations seem too high, however, and a tightening Fed has traditionally pressured valuation multiples. Consumer discretionary seems most at risk. Exporters could see relief from a weaker USD. Don’t throw in the towel