2009 was a year of two parts for investors. During the first three months, global stock markets continued to slide amid economic worries and fears about the financial system. However, sentiment steadied in the wake of a global coordinated approach by governments and central banks to support growth. Awash with liquidity, financial markets rallied strongly from April.
As we enter a new year, investors have turned their focus from the duration of the recession to the strength of the global recovery. While developed countries continue to face structural problems, emerging markets are on a much stronger footing. Monetary conditions are also likely to remain easy for the first half of the year, as central banks err on the side of caution to avoid derailing the recovery.
Given the strong gains to date, valuations of many risky assets are no longer at bargain levels. However, we remain positive on corporate credit and high-yield bonds. Yields on corporate and high-yield bonds have come down significantly, but they are still attractive when compared with the yields on government bonds.
In the equity arena, interesting opportunities exist at the sector and regional level. We have a preference for defensive sectors like healthcare, which are trading at a discount relative to the more cyclical areas of the market. Meanwhile, Latin America continues to stand out amongst emerging markets, due to the combination of relatively attractive valuations and positive economic fundamentals.
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This document has been prepared for information only. Information contained in this document is obtained from sources believed to be reliable, however HSBC does not guarantee its completeness or accuracy. Information is correct as of January 2010. This material is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or securities nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The specific investment objectives, personal situation and particular needs of any person have not been taken into consideration. You should therefore not rely on it as an investment advice. Opinions and estimates expressed are subject to change without notice and HSBC expressly disclaims any and all liability for representations and warranties, express or implied, contained herein, or for omissions. All charts and graphs are from publicly available sources or proprietary data. The mention of any security should not be construed as representing a recommendation to buy or sell that security, nor does it represent a forecast on future performance of the security.
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Downgrade and default rates are set to fall in 2010, which would be positive for high-yield bond prices.
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Positive fundamentals and investors’ appetite for yield will also support prices, although we continue to stress that the asset class is better suited to long-term investors who can hold the bonds to maturity.
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