Contrarian HSBC Bets on Stocks That Rise With Weaker Bond Yields

(Bloomberg) -- While equity investors left and right are scrambling to find ways of benefiting from rising U.S. government bond yields, HSBC strategists are looking to do the opposite.

The bank is recommending that European investors consider buying equities poised to benefit from falling bond yields, based on its view that the 10-year U.S. Treasury yield will peak around the end of the first quarter and weaken to 2.3 percent by year-end. It’s a view at odds with the one of Goldman Sachs Asset Management and large market speculators betting the 2018 bond-market rout will resume in the days ahead.

“This suggests that investors should start to think about how to play sectors that do well when bond yields fall back,” Robert Parkes, a director within HSBC’s European equity strategy team, said by phone. “A key strategy when this happens is to focus more on growth stocks than value stocks and add duration to your portfolio.”

Sectors that stand to gain from falling yields are growth shares such as luxury goods and ones with higher dividend yields like utilities and energy, Parkes said. HSBC has an overweight position on those in Europe, while it’s been cutting its position in financials, where it still holds a modest overweight but says the yields environment will be a headwind.

HSBC has maintained its end-2018 target of 3,750 for the Euro Stoxx 50 Index through the latest selloff, implying about 12 percent upside from current levels. Parkes said he expects a combination of slowing European economic growth and less supportive monetary policy to curb equity gains this year.

“Going into 2018, we always expected a more difficult year -- still an up year in equities, but with limited upside,” he said. “This year will be tricky and more of a stop-and-start year, which has to do with the interaction between growth and monetary policy.”

To contact the reporter on this story: Aleksandra Gjorgievska in London at agjorgievska@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Paul Jarvis

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