In 2009 we are allegedly entering the unknown. In fact, we do so every New Year; it just
doesn’t always feel like it.
The first half will likely see some horrible macro and corporate data, and further financial
debris: we doubt that the volatility bubble is deflated yet. However, the epicentre of this
crisis has been in the financial sector, and after an almighty wave of de-stocking it may
remain there. Almost unnoticed, US households’ free cashflow is back in balance.
Massively stimulatory policy offers the most obvious eventual support for profits.
Valuations are the second most obvious likely support for stocks, even allowing for
further large falls in earnings in 2009. Stocks do look less cheap than corporate bonds, but
that has not stopped them outperforming in the US by 18% since 20 November: so far at
least it has paid to be eclectic there (see Dancing about architecture, 17 December).
The market has already rallied more than halfway to the end-2009 targets published in
Prospects and themes for 2009, 4 December: this makes us a little nervous, but we’d urge
an open mind. To date we’ve suggested that long-term investors grit their teeth and stay in
the market: we stick with that. In this spirit we trim our small regional and sectoral
positions further. We reduce overweights in the US, oil and European utilities; and
underweights in Europe (ex-UK), GEMs and some cyclical and consumer sectors.

Summary and conclusion
In 2009 we are allegedly entering the unknown. In
fact, we do so every New Year; it just doesn’t
always feel like it.
The first half will likely see the publication of
some horrible macro and corporate data, and
further financial debris is likely to surface.
US GDP has likely been shrinking at an
annualised pace of 6% or so (we’ve seen one
estimate at 8%) in Q4, and US unemployment is
likely to stay on a trend that is widely expected to
peak at 10%.
Meanwhile, resources analysts have joined financials
in the race to downgrade earnings by most, and this
winter’s corporate results will likely fall well short of
prior expectations (see table for our full-year topdown
guidance on EPS growth).
Against this backdrop, while implied S&P
volatility may have fallen to ‘only’ 39%, we doubt
that its return to earth will be a straight line: the
volatility bubble is not deflated yet.
However, while a Depression scenario seems a
risk, it is still possible that the epicentre of this
crisis has been within the financial sector, and
EPS growth (%): bottom-up consensus and HSBC
top-down forecasts
2008 E 2009 E 2010 E
US Consensus -7 -2 18
HSBC -20 -25 5/10?
Pan-Europe Consensus -14 0 11
HSBC -20 -25 5/10?
Japan Consensus -40 13 16
HSBC -15 -15 5/10?
Memo:
MSCI GEMs Consensus -1 -8 17
HSBC -30 -20 5/10?
Source: HSBC, Thomson Financial Datastream
that after an almighty wave of de-stocking in Q4
and Q1 it may mostly remain there.
The policy response to date has been massive –
for the US, close to USD6 trillion (equivalent in
scale to more than half of the commercial bank
sector’s aggregate balance sheet) in various
special measures, and that’s before the impact of
lower LIBOR and mortgage rates and the pending
fiscal stimulus.
The bottom line, as always, is the behaviour of the
US consumer, ‘customer number one’ for global
business. On some measures their confidence has
never been lower, but gas prices have more than
halved and households’ free cashflow – see chart
on page 1 – is back in balance (the main

accounting counterpart to the emergence of
Japan’s first-in-a-working-lifetime trade deficit).
The pending retrenchment in final spending may
yet prove less traumatic than feared.
Meanwhile, we suggested before Christmas that
stocks needn’t wait for credit to rally – in contrast to
the consensus view – and to date at least it has paid
to be eclectic. Corporate bonds do look cheaper than
stocks, but in the US they have underperformed the
S&P by 18% (chart) since 20 November.
We show again below how stocks look (very)
inexpensive by the standards of the last two
decades, even allowing for a big (30-35%)
shortfall in 2009 EU and US earnings relative to
the bottom-up consensus. Of course, if we go
back to the 1930s, multiples were lower still – but
as we’ve long suggested, the accounting
framework was a lot more lenient then. We
borrow below a quote from the recently published
SEC report that raises our scepticism here.
The market has already rallied more than halfway
to the end-2009 targets published in our 4
December report, Prospects and themes for 2009:
tactically this makes us a little nervous, but we
gave up making short-term calls in the autumn.