Markets yet to fully price in slowdown, warns HSBC's Dunsford

Value is emerging in equities, but the market is not yet pricing in a global economic slowdown, warns HSBC’s Jim Dunsford.

World stockmarkets have fallen back by almost 10% from their April highs amid concerns about sovereign debt and the sustainability of the recovery.

However, Dunsford, who co-manages the HSBC GIF Global Macro fund, says that another pullback is likely, although he does not expect a double dip recession.

‘Equities are cheap, but they could get cheaper because the market is still reacting to data, which indicates that the slowdown is not fully priced in yet,’ he says.

‘We saw that last week with the ISM data, which was down more than expected, and the market reacted very badly. Investors are reacting more to the direction of the change rather than focusing on the actual numbers.’

‘If the market does fall back we would be prepared to top up our holdings because we are positive on equities over the medium-term.’

Overall, the fund has a 6% net long exposure to equities.

In terms of the fund’s fixed income positioning, Dunsford is focused mainly on two year US Treasuries, 10 year Japanese government bonds and gilts.

‘This has not helped recently, but we still think that the positions are worth continuing with because two year Treasuries yielding under 70 basis points is unsustainable in the absence of deflation,’ he says.

While Dunsford’s fixed income exposure is focused on the major economies, his currency positioning is centred on the developing world and commodity currencies.

‘We have long positions in a range of emerging Asian economies, which have strong fundamentals, better growth prospects and less issues in terms of sovereign debt,’ he says.

‘We have funded this out of shorts, typically in the major currencies, such as the euro, which although it has come back a little, is by no means undervalued or cheap and we are still inclined to play on the short side.’