Feb. 5 (Bloomberg) -- U.S. President Barack Obama needs to establish a “bad bank” with at least $1 trillion to take over sour assets at financial companies, HSBC Private Bank said.

“If you set up a ‘bad bank’ with at least $1 trillion to start, that itself will have a major impact,” said Arjuna Mahendran, Singapore-based head of investment strategy in Asia for HSBC Private Bank, which managed $499.3 billion as of June 30, 2008. “On a worst case basis, at least a quarter of the problems in the banking system will be resolved.”

White House officials are reworking plans for a financial rescue, which may include setting up a so-called bad bank to soak up troubled assets and revive consumer lending. Obama yesterday prodded lawmakers to complete a $900 billion economic stimulus package, saying “a failure to act and to act now will turn crisis into catastrophe.”

Concerns over the plan’s passage will keep markets “fairly jittery,” Mahendran said in an interview in Hong Kong today. The U.S. housing market, the origin of the global financial crisis, will probably bottom out in May or June of this year, he said.

“A lot of that optimism will evaporate by September or October when we have another round of weak earnings numbers and economic numbers,” he said. “By the end of the year, you’ll probably see the indexes pretty much where they started the year. So you can’t buy and hold.”

‘Periodic Rallies’

Mahendran recommends conservative investors to hold cash and short-term bonds, while stockholdings are necessary for returns on wealth, with “periodic rallies” emanating from the U.S. market. He favors consumer staples, health care and utilities, and has been buying stocks in companies including McDonald’s Corp., Wal- Mart Stores Inc. and Johnson & Johnson.

“All these are great, solid, defensive names which have outperformed in the bear market,” he said.

McDonald’s, the world’s largest restaurant company, declined 4 percent in the past six months through yesterday, less than the 33 percent slump in the Standard and Poor’s 500 Index. Wal-Mart, the world’s largest retailer, lost 21 percent. J&J, the world’s biggest maker of medical devices, dropped 16 percent.

Mahendran said he’s looking to sell those shares and may shift to companies likely to benefit from an increase in China consumption, such as Procter & Gamble Co. and Carrefour SA.

Procter & Gamble, the world’s largest consumer products company, dropped 20 percent in the past six months, while Carrefour, Europe’s largest retailer, retreated 15 percent.

To contact the reporter on this story: Hanny Wan in Hong Kong at hwan3@bloomberg.net

Last Updated: February 5, 2009 04:03 EST