Despite improving confidence in global markets, economic growth is still fragile, says HSBC Global Asset Management.

According to Simona Paravani, Global Investment Strategist at HSBC Global Asset Management, although indications suggest that the risk of a prolonged global recession has diminished, economic indicators remain too weak and fragile to infer there are green shoots of recovery.

In her monthly market outlook Global Investment Views, Paravani argues that although confidence is improving in isolated areas from their low point, global economic growth is still fragile and the unemployment situation continue to deteriorate. For example, US unemployment rose to 9.4 per cent in May, the highest level since September 1983.

She points to contracting economies worldwide, as 2009 growth forecasts continue to be revised downward, and as sluggish domestic demand provides little support for waning export demand.

In the US, for example, the consensus forecast for 2009 GDP growth was revised down by 0.2 per cent to -2.9 per cent year on year in May, while the Eurozone economy is expected to shrink by 3.8 per cent this year, indicating that the growth outlook remains weak despite the recent improvement in confidence.

Following a strong rally in Asia (the MSCI Asia ex Japan index rose by more than 14 per cent in May, making it one of the top performing regions globally), Paravani believes that the strength of these markets is reflected in valuations and it is difficult to see them making further progress unless developed markets also advance.

She adds, ‘The sustainability of the rally rests, in part, on improvements in the global macro situation, as it is difficult to envisage Asian equities continuing to appreciate if major developed markets weaken. From a macro perspective, the Asian region displays better fundamentals and economic data than other parts of the world. However, following the recent rally, valuations appear to already reflect this relative economic strength.’

HSBC Global Asset Management’s preferred asset class from a top down view remains corporate debt. Paravani says despite the recent market rally, valuations remain attractive, and both investment grade and high yield are likely to benefit from extensive government and central bank support, which will further enhance the lending environment for corporates.

Within currencies, Paravani maintains a moderate negative view on sterling relative to the euro due to the likely negative impact of quantitative easing measures adopted by the Bank of England. Standard & Poor’s recent downgrade of the credit outlook for the UK adds to the country’s weak outlook.