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Volatility, Bond Yields and Stock Opportunities

Feb 13, 2018

Volatility, Bond Yields and Stock Opportunities

Volatility in equity markets can raise red flags for investors but, as Aleksandra Gjorgievska suggests in her recent Bloomberg article “Contrarian HSBC Bets on Stocks That Rise with Weaker Bond Yields”, now may be the time for action over hesitation. As global markets slide, fundamentally sound equities tend to represent a better value. With surging coupon rates reaching highs in fixed income markets, this opportunity may be magnified.

Bond yields, coinciding with a dip in global stock markets, have spiked in recent weeks. Through its naturally negative correlation to equity prices, rising returns on bonds have further fueled the downward shift in the equity market. Strategists at HSBC, however, do not view this rise in yields as sustainable, and have predicted that US Treasury bond rates may be peaking. If this is the case, they believe equity markets present greater opportunity to hopeful investors.

Falling yields are a bullish indicator for equity investors and they believe focus now should be on stocks that perform well when bond rates fall back. There are individual sectors, such as luxury goods, utilities, and energy that are more sensitive to bond rates and presently deserve focus.

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