Dovish central banks across the world to help Asian equities, says HSBC

Global brokerage HSBC believes accommodative monetary policies by central banks across the world will be the next driver for Asian equities. 

"HSBC expects a 25-basis point interest rate cut in September and another 25 bps in December (from two 25-bp cuts in 2020 previously). This may create space for more accommodative monetary policies across Asia," said Herald van der Linde, head of equity strategy (Asia Pacific) at HSBC. 

HSBC has announced key changes to its country allocations in Asia. India continues to be its biggest ‘overweight’ (OW), along with Indonesia, the Philippines, and Thailand. 

HSBC has upgraded Indonesia and Thailand from 'neutral' to OW. HSBC has a 'neutral' stance on China. It has upgraded Hong Kong and Malaysia from 'underweight' (UW) to neutral. 

HSBC has slightly revised upwards its year-end Sensex target from 40,310 to 40,810. The target implies an upside of just 3.5 per cent, from the Sensex's last close of 39,435.

The brokerage says high valuations will cap the upside. "Valuations have risen sharply, with Asian price-to-earnings  up around 15 per cent since the start of the year, from 11 times to 12.8 times."

HSBC is of the view that the MSCI Asia ex-Japan index could gain only 5 per cent from its current levels by 2019-end.

The brokerage says the rally so far this year has been supported by softening of US bond yields. 

But, it says a further decline in yields would be negative for equities.

"The initial driver of this rerating in Asian equities was the decline in bond yields in late 2018 and early 2019. That is now mostly over, given bond yields are now hovering around HSBC's year-end target of 2.1 per cent (US Treasury 10-year forecast). Indeed, any rise in bond yields would be a negative to the Asian equity universe," says Linde.

On Tuesday, the US 10-year Treasury was hovering around 2 per cent.

HSBC says investors can "become less defensive in the coming months."

The brokerage has an OW on high-beta sectors including financials, industrials and utilities. On the other hand, it is UW on technology, communication services and health care.