Position your portfolio for a rally

Doom and gloom persists around the market place but improving indicators and growing liquidity could drive a fourth quarter risk asset rally, according to HSBC’s Philip Poole.

Although investors’ concerns have understandably focused on the risk of a double-dip recession, most are continuing to overlook the fact that much of the world is still performing strongly.

Poole, global head of macro and investment strategy at HSBC Global Asset Management, says: ‘When investors fret about double dip risks, US concerns are automatically translated into global concerns. But this ignores the fact that in large parts of the rest of the world, activity remains encouragingly robust.’

He points to Bric powerhouses China and India, which continue to deliver strong growth. China is expected to deliver credible GDP growth of close to 9% in the second half and into 2011 with Chinese manufacturing PMI supporting this by moving back into expansion territory.

In India, the economy grew at its fastest pace in two years in the second quarter surging 8.8% year on year.

‘The economy is showing few signs of cooling despite policy tightening and the HSBC India manufacturing PMI showed sustained expansion in manufacturing for the 17th successive month,’ Poole says. ‘In fact, rather than evidence of a slowdown, inflation pressure and deterioration in the trade balance suggest the authorities will need to continue to tighten to prevent overheating.’

Over in the developed world, barring Japan, Poole says there are also ‘encouraging signs of life.’ Australia’s Q2 GDP numbers show the economy expanded by 1.2% up from 0.5% and up 3.3% in annual terms. Consumer spending surprised on the upside and construction remains robust.

Even Europe has been improving with EU growth accelerating sharply in the second quarter with German GDP in particular very strong.

‘In many respects Europe’s economic rebound, including much of emerging Europe, is in sharp contrast to the market’s perspective of a stalling recovery in the US and Japan,’ he adds.

Although US GDP was strongly marked down, The Conference Board’s consumer confidence index rose 2.5 points to 53.5 in August, up from a revised 51 in July and ahead of market expectations.

Employment and housing data will continue to be crucial to investors’ expectations, but consumer spending rose by 0.4% in July and commerce department figures are also beating the consensus.

‘Fears regarding the US financial sector may also be about to ease,’ Poole says.