Banking group HSBC has warned investors to remain moderately cautious on international shares as 2010 earnings estimates are too high.
Analysts expect median company earnings within the MSCI World Index of stocks to jump 25.6 per cent in 2010, which is on the "high side" relative to history, HSBC Bank Australia global investments head Charles Genocchio said.
The risk of disappointment in companies not meeting those forecasts is prevalent if they are not supported by further strong earnings releases, he said.
Additionally, the positive earnings surprises this year have been driven more by cost cutting than by revenue growth, Genocchio said.
"For example, in the second quarter, while over 70 per cent of companies in the S&P 500 beat earnings expectations, only around half beat revenue estimates," he said.
"In order for earnings improvements to be sustainable over the next few quarters, we need to see more evidence of top line growth."
HSBC warned that companies may struggle to deliver that top line growth as consumption remains lacklustre and is dampened by high levels of unemployment and ongoing deleveraging in the private sector.
Genocchio also said the rally in global equity markets has pushed valuations back up to their levels of early 2007 and therefore are no longer at the bargain levels of early 2009.
HSBC continued to maintain a positive stance on investment grade and high-yield corporate bonds and reiterated its preference for credit over stocks within the risky arena.
Still, Genocchio said there were several opportunities within global equities.
Defensive sectors including healthcare and telecommunications within the MSCI World Index still looked undervalued, even relative to history and in comparison to their cyclical peers.
"The valuation disparity, combined with the more stable earnings profile from these sectors, suggests they may have the potential to outperform more cyclical stocks," Genocchio said.
The global healthcare and telecommunications sectors both traded on 12-month forward price-earnings ratios of 11.8, compared with 12.4 for utilities, 12.9 for energy, 17.9 for information technology and 20.1 for consumer discretionary.
