Despite some recovery in the world's equity markets following a turbulent start to the year, strategists at HSBC Holdings Plc are urging caution when attempting to buy a dip in stocks.  

"Cash is king in a world with [debt] overhangs," the team, led by Global Head of Asset Allocation Fredrik Nerbrand, said in a note published late on Thursday. "While markets have stabilized following the January sell-off, we find limited reasons to add to equity risk. We prefer to have allocations to high-yield and emerging market debt where risk premia are more appealing." 

Here are two of the big factors they cite for their continued caution: 

A slowdown in corporate earnings

There's been a great deal of talk about a profit recession over the past few months, and HSBC doesn't think the conversation is going to end soon. Without more of a reason to be optimistic about earnings, there's little cause to be bullish on stocks. "Unless corporate earnings start to turn up, there is very limited upside for economically sensitive assets such as equities," HSBC writes. 

Still lofty valuations

While valuations have certainly become a bit more attractive over the course of the downturn, HSBC points out that it is still hard to snap up market bargains. The team is skeptical, however, about how much of a factor valuations have been or will be in the future: "The current drawdown is hardly spectacular. Nor were valuations a reason for the sell-off or a reason why markets should stabilize at this point."

David Fuller's view

HSBC may not have enjoyed the best of times recently but I find this article surprisingly bearish.  Nevertheless, there is plenty of cautious to bearish sentiment regarding stock markets right now, which I would no longer regard as a contrary indicator following a good rally in the second half of February and early March. 

At a time of considerable uncertainty, I would not be surprised to see a lengthy period of ranging by most stock markets.  Among individual sectors, exceptions are some inform tech and biotech shares, plus defensive stocks such as Kimberly-Clark Corp which Eoin has often shown.

However, the best performing sector recently is the one where very few investors other than a few stale bulls had long positions, prior to February.  These are the industrial commodity shares which continue to rally sharply on short covering and some bargain hunting now that supply cutbacks are being introduced.