Photographer: Andrew Harrer/Bloomberg

HSBC Says Be Cautious When Owning One of Wall Street's Most Beloved Sectors

If HSBC is the doctor, it just labeled the health-care sector as high risk.

HSBC made waves late last year with its forecast for the yield on the 10-year U.S. Treasury to dip to 1.5 percent at the end of 2016, at a time when most strategists were expecting a 2 percent to 3 percent range.

Now the bank is making another out-of-consensus call, partially because of its lower-for-longer 10-year yield bet. HSBC is telling clients to look at sectors other than health care, which has been one of Wall Street's most highly recommended areas for 2016.  

"In a world where global growth remains low and HSBC forecasts lower bond yields–10 year U.S. Treasury yield at 1.5 percent and German Bunds [at] 0.2 percent for end 2016–these sectors [healthcare and staples] are likely to continue to command a premium," analysts led by Ben Laidler say.

And while both health-care and staples stocks may be expensive, HSBC prefers the latter, given risks currently surrounding the pharma space: 

"We see greater risks to healthcare where negative news-flow in the lead up to the U.S. presidential election could further weigh on the sector, even if the drug pricing system ultimately remains unchanged. Hilary Clinton’s proposed cap on patients drug costs may have been a catalyst for an 11percent decline in the MSCI U.S. Healthcare index over the next two weeks. The last time that significant healthcare reforms (including drug price reforms) were proposed in the U.S. was during Bill Clinton’s 1992 presidential election campaign. Hillary Clinton was a pivotal proponent of such reforms and led the 1993 National Health Care Reform task force. The U.S. Pharmaceutical sector underperformed significantly, falling c[irca] 40 percent in real terms from April 1992 to April 1994, before the plans were abandoned."

Politics isn't the only issue the sector might encounter, according to HSBC. The analysts add that many of the positive factors that helped health care last year might not be around in 2015, with one of them being mergers and acquisitions. While pharmaceuticals saw a large amount of M&A activity in 2015, the bank says the top might now be in. "Pharma has led major global sectors in M&A activity over the last five years," the team writes.

Meanwhile, the analysts figure that consumer staple companies that make and sell basic household goods are the better defensive bet in 2016.

"By contrast staples sectors have relatively lagged, with the exception of beverages, which has seen dramatic global consolidation in recent years. Whilst we see room for activity levels to remain high, the risks are that pharma cannot lead for another year," the analysts note.

Both of the sectors have struggled recently, with declines over the past year that have accelerated in 2016. 

Given HSBC's bullish attitude toward staples, it gives a list of some stocks that it believes offer the best opportunities in the sector. The list includes such big names as Kimberly-Clark Corp.Dr Pepper Snapple Group Inc.Hormel Foods Corp.Clorox Co., and J.M. Smucker Co.

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