• Global stocks have stormed higher this year with the MSCI All World Index up close to 10%.
• The Index still remains nearly 10% below the record high set in January last year.
• Opinion differs as to whether the it will be able to retest or surpass the previous highs this year.

Stocks around the world have roared higher this year, helped primarily by reduced concern about further monetary policy tightening from the Federal Reserve, easier fiscal settings in China and the state of trade negotiations between China and the United States.

The MSCI World Index has jumped by 8.5%, helping to reverse a large chunk of the steep declines seen late last year.

The concerns expressed by investors back then appear to be nothing more than a distant memory, even with signs of a further deterioration in the global economy.

The question many are now pondering is what will happen next? Is the rally a sign of things to come or at risk of a reversal?

While progress in Sino-US trade negotiations will go a long way to determining what will happen in the near-term, HSBC’s global equity strategy team thinks there’s more fuel in the tank to push stocks even higher. A lot higher.

“Global equity markets have been on a tear in 2019, largely fuelled by a re-rating of overly depressed valuations,” it says.

“In our view, the recent poor earnings revisions cycle is through the worst. Economic activity is easing but above-trend, and we see upside to a US-China trade deal and China policy stimulus.”

So pretty much everything that can go right will go right in HSBC’s opinion.

But how much can stocks rally from here?

In the bank’s opinion, take the gains seen this year and double them, and then add a little more.

“We continue to see upside and believe the rally may have another 9% to go before the end of the year,” it says.

“We still see some room for further multiple expansion but believe this is becoming increasingly limited.

“Instead, for global equities to move meaningfully higher we will need to see a stabilisation in earnings estimates which have rolled over notably during the last few months.”

In part, it’s rosy outlook is underpinned by more realistic expectations for earnings among investors.

“We also find it encouraging that in both the regions the price reaction to beats and misses has improved quite significantly,” it says.

“We take this as a signal that market expectations have come down to more reasonable levels, which should improve the risk-reward for companies around earnings announcements.”

While HSBC believe there’s a lot more upside to come for stocks, not everyone shares that view.

Credit Suisse, for one, believes the recovery in stocks has already run its course in 2019.

“The rally in equities year-to-date has taken us close to the year-end targets for global equities,” says the bank’s global equity strategy team.

“We leave these targets unchanged, implying around 2% upside to global equities, but think we are close to the end of our tactical rally, and thus believe investors should be benchmark equities rather than overweight.”

So Credit Suisse thinks any gains in the year ahead will be had won, partially because many of the supportive factors that helped drive the recovery – such as oversold positioning, the Fed’s dovish pivot, optimism over trade negotiations and further China stimulus — are now largely priced in.

On the latter, the potential for more China stimulus, Credit Suisse says that if “stimulus hopes are disappointed, the downside risk could be significant”.

It also believes there’s a risk that markets have become too complacent about the outlook for policy from the Fed, especially should the recovery in risk appetite continue in the near-term.

“We think against a backdrop where core CPI is 2.2% and core PCE is 2.0%, and where GDP growth is forecast by 70% of economists to be in line with or above trend in 2020, that if markets rally meaningfully further, the Fed will become more hawkish,” it says.

“Indeed, the market is assuming the Fed will leave rates unchanged from here, with a higher probability of a cut in rates priced in than a rise once we get to Q4 2019.”

Credit Suisse still expects further tightening from the Fed, forecasting two 25 basis point increases in the funds rate in the second half of the year.

It also warns that complacency towards a trade deal between the US and China is also high.

“The consensus seems to be for a mutually acceptable settlement between the US and China. Hence, the market seems vulnerable in the event of a disappointing outcome in the trade negotiations,” it says.

“The markets seem to be discounting a positive outcome… [and] the rally in the equity market might encourage President Trump to be more push for more concessions.

“There has been little sign that China is willing to move significantly on one of the US administration’s key demands to end cheap financing for State-owned enterprises (SoEs).”

As for who ends up closer to the pin in terms of their year-end forecasts — HSBC or Credit Suisse — only time will tell.

The MSCI All World Index currently trades at 498.2.

It’s surged 14.4% from the lows of late December but is still down 9.4% from the record peak of 550.6 set in January last year.

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