Brace yourselves for a looming recession, warns analyst

The global index is down by 16% since August 1 and by 19% since it peaked in late April.

HSBC says the risk that the market turmoil tips the world into a new recession and causes earnings to turn down sharply has risen.

Here’s more from HSBC:

Some valuations are at levels not seen since the early 1980s
But the market turmoil raises the risk of recession...
...which means that analysts probably need to cut forecasts further and that sentiment will stay fragile for a while

Markets have gone into freefall in the past week or so. The global index is down by 16% since August 1 and by 19% since it peaked in late April. That is not quite in the official bear market territory yet - but note that some European markets (particularly Germany down 25% and Italy down 24% this month) are.

What should investors do now? Given the damage to sentiment in the past few weeks, it is hard to see markets rebounding healthily straight away. The risk that the market turmoil tips the world into a new recession and causes earnings to turn down sharply has risen. It will be a few months before the smoke clears and it becomes plain how much damage has been done.

Analysts have barely adjusted their earnings forecasts yet but historically, in a recession, they tend to cut them by around 30-40%. However, valuations have become very cheap with the PB (never mind prospective PE) for Europe, for example, down to 1.1x, a level it hasn't seen since the early 1980s.

We still look for three conditions before calling for a bounce: (1) cyclical indicators, including earnings, to come down further, (2) risk events (notably European debt) to pass, and (3) capitulation. We are close to getting there with (3) but not yet for (1) and (2).

In the meantime, we advise investors to buy stocks with good long-term growth prospects, relatively little short-term earnings risks that have become cheap (see our two notes Stocks to buy in uncertain times for Europe and Asia, published this week). We remain overweight the US (more defensive than Europe) and EM (growth prospects still good).

The people you want to reach are already in this room.

Every quarter, SBR lands on the desks of the founders, CFOs, and directors running Asia's most consequential companies. Every day, they open our newsletter and read our website. It's a room that took twenty years to build — and it's the one most of our partners are trying to get into.

The good news is that the door is open. We work with companies on thought leadership articles, sponsored content, industry summits across Southeast Asia, regional awards programmes, podcasts, and media placements in print and digital. The shape of the right partnership depends on what you're trying to do, which is why we'd rather start with a conversation than send a rate card.

If you have something this room should know about, tell us. We'll tell you honestly whether we can help, and how.

No rate cards until we understand the brief. It's a better use of everyone's time.

Book a meeting

| Or download the media kit (PDF)

240,000 senior readers quarterly in print Top 1,700 Singapore companies reached

7 markets across Southeast Asia