Despite some recovery in the world's equity markets following a turbulent start to the year, strategists at HSBC Holdings 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." 

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 anytime 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.

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. However, the team is skeptical in 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."

Taking all of this into account, HSBC has updated its asset allocation model, increasing its cash holdings by 11 percentage points to 17 percent in their six-month tactical portfolio, while decreasing its allocation to German and Swedish bonds, where yields have "have now dropped to levels that offer limited scope for future returns." Meanwhile, the team is cutting its losses on Chinese equities, noting simply that the position "has not performed in line with ... expectations."

"Economic trends continue to drag lower," the team said. "This implies further risks to corporate earnings and overall investor sentiment. A slow growth outlook also increases the possibility of greater perception of political risks. We can see that correlations between periphery bonds and equity markets have increased. This implies that markets are once again more concerned about sovereign debt overhang."

HSBC's note follows cautious calls by other Wall Street firms including Citigroup Inc., which said the odds of a global recession continue to increase. Meanwhile, analysts at JPMorgan Chase & Co. recommended yesterday that investors use the recent rebound to sell stocks. They also cited a worsening outlook for economic growth, corporate earnings and the looming risk of recession.