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Valuations following stock market rally no longer compelling, says HSBC

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Following the stock market rally in the second quarter, valuations for equities and corporate debt are still relatively attractive but are no longer at the same appealing levels as they

Following the stock market rally in the second quarter, valuations for equities and corporate debt are still relatively attractive but are no longer at the same appealing levels as they were in the fourth quarter of 2008 or in February during the low point, according to Simona Paravani, global investment strategist at HSBC Global Asset Management.

Paravani (pictured) says in the absence of compelling valuation buy signals, strong positions are not recommended.

Writing in HSBC’s latest Global Investment Views report, Paravani also says second quarter corporate earnings continue to beat forecasts. But as earnings expectations for 2009 were reduced to extremely pessimistic levels, it makes it relatively easier for companies to surprise on the upside. She says the market is likely to start focusing on 2010 earnings forecasts towards year-end. While 2009 earnings forecasts were the most bearish on record, the latest 2010 numbers are among the most optimistic ever. While this could in part be attributable to the low base of 2009, the risk is that 2010 earnings could disappoint as economic growth next year is likely to be shallow.

On the positive side, Paravani says macroeconomic indicators continue to improve, particularly in the US and the emerging markets. Of particular significance, the US housing market is showing signs of recovery. For instance, new home sales in the US climbed 11 per cent month-on-month in June. This is significant as the housing market was one of the key causes of the financial turmoil.

While the risk of a severe and prolonged economic slowdown has receded, the potential recovery in the second half of this year and 2010 is not likely to be strong, says Paravani. This is especially true of the developed world as structural issues remain and are likely to constrain consumer spending.

She says growth is likely to be anaemic for three key reasons. First, as economic growth stabilises, governments may look to withdraw some of the stimulus measures in order to reduce the levels of public debt. Second, labour market conditions continue to deteriorate and in some countries unemployment is at multiple-year highs. Even if the economy recovers, the improvement in the job market is unlikely to be immediate or significant. As such, this will remain a headwind for consumer demand and growth. Third, the need for households to deleverage and rebuild savings will also keep consumption subdued.

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