HSBC: Stocks Price In Recession, Creating Emerging Market Bargains

Recession Fears Spike to 35% as Markets Sell Off

Global stock markets are reacting to geopolitical conflict by pricing in a significant economic downturn, not the stagflation scenario many feared. According to an HSBC report, the implied probability of a recession priced into equities has surged to 35% from just 10% two weeks prior. Over the same period, the probability of stagflation has held steady at a low 8%. This divergence indicates that investors are selling assets based on expectations of a sharp economic slowdown rather than a 1970s-style period of high inflation and low growth. Since late February, this recessionary trade has driven global equities down by approximately 5% and caused cyclical stocks to underperform defensive sectors by around 9%.

HSBC Flags Up to 10% Undervaluation in Select Markets

HSBC's analysis identifies several markets where the sell-off appears excessive, creating compelling entry points. The stock markets of South Korea, South Africa, and Indonesia are now considered oversold by a margin of 5% to 10%. These markets are noted for their relatively low exposure to rising oil prices, making their current valuations particularly attractive. In the Gulf region, the Dubai and Abu Dhabi stock markets are trading at a 10% discount to their fundamental value, though HSBC cautions this gap likely reflects a geopolitical risk premium. Based on this outlook, the bank favors resilient cyclical sectors such as materials, industrials, and financials over consumer-facing sectors like retail and travel, which are deemed most vulnerable.

Bank of America Warns Market Bottom Is Not In

A contrasting analysis from Bank of America suggests that the market has not yet reached a point of maximum pessimism. BofA's Bull & Bear Indicator registered 8.5 in March, a level that signals investors should sell rather than buy. The survey found that fund managers remain 37% overweight in equities, a position far from the underweight allocations seen at previous market lows. Furthermore, cash levels are at 4.3%, below the 5% threshold that BofA considers a buy signal. According to BofA's strategists, investors are not actually pricing in a recession, assigning only a 5% probability to a hard landing, which directly challenges the narrative suggested by HSBC's model.