The HSBC Holdings Plc headquarters building in Hong Kong, China.
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LONDON — HSBC Asset Management has shared a raft of advice with clients looking to navigate the current “wall of worry” facing global markets.
With concerns about global growth and inflation causing jitters of late, along with the prospect of premature central bank policy adjustments and the resurgence of Covid-19 in certain parts of the world, investors have plenty on their plate when deciding where to allocate money.
In a message to clients earlier this week, HSBC Asset Management Global Chief Global Strategist Joe Little recommended a number of strategies, including looking at Asian fixed income, “reasonably priced inflation hedges,” and value and cyclical stocks.
Consensus forecasts for U.S. 2021 GDP [gross domestic product] have been cut by 0.7 percentage points to 5.9%, according to HSBC’s aggregate, while supply chain disruption has pushed up U.S. 2021 inflation expectations by a full percentage point to 4.3%.
Economists have revised down the outlook for China’s 2021 GDP growth to 8% (from a previous 2021 forecast of 8.6%) and Little noted that the third quarter had been difficult for emerging market asset classes more broadly.
“Naturally, the outlook depends on how growth and inflation influence the current priced anxieties. Covid-19 and supply-chain disruption will remain challenges,” he said. “But we expect these factors to delay the recovery, rather than derail it. What could change the growth outlook, however, is the policy backdrop.”
‘Twin-tracked’ recovery
HSBC anticipates that across major economies, GDP in 2022 should grow around 4%-5.5%, with the U.S. and Europe at the lower end of that range and the U.K. and China at the top. Meanwhile, inflation is projected to revert to between 2-3%.
“But outside the main economies, there is significant divergence. Many emerging markets and frontier economies are lagging – which all suggests the global recovery is on twin tracks,” he added.
Given this environment, Little suggested that there were opportunities in emerging market fixed income, but he advised clients to be sensitive to the dollar outlook and this increasingly “twin-tracked recovery.”
“Asian fixed income remains our preferred risk-adjusted bet in that area,” he added.
‘Low-for-long interest rates’
While labor markets broadly continue to improve — weekly U.S. jobless claims hit a new pandemic-era low of 290,000 last week, compared to 6.15 million in April 2020 — HSBC prefers stocks to bonds, despite equity markets being near all-time highs. Little suggested that strong corporate profits will remain the “critical driver.”
“Our research points to a sustained regime of low-for-long interest rates, a negative premium in global bonds, thin risk premium in credits, and a neutral looking premium in international equities,” Little said.
“This means we need to be realistic: investment returns over the next 24 months won’t match what we have seen over the past 12. However, we find it hard to conclude stocks are at bubble valuations yet.”
Risk premium is the amount of return an asset offers above the risk-free rate of return.
Inflation outlook
Although “not big believers” in the scenario in which transitory inflation becomes “sticky,” either because labor supply doesn’t return or supply chains do not repair themselves, HSBC acknowledges that it is a risk.
New data on Friday showed euro zone inflation expectations hitting an 8.5-year high, while the Bank of England’s chief economist warned that U.K. inflation could hit 5%. Inflation has also continued to run hot stateside in recent months, leading some analysts to believe that it will be more persistent and pervasive than the Federal Reserve anticipated.
“This ‘sticky prices’ scenario would mean central banks were wrong about inflation, thus requiring a more abrupt policy tightening,” Little said. “As such, investors might consider reasonably priced inflation hedges as a substitute for bonds. In commodities, copper or carbon look interesting. As do “real cash flow assets”, including defensive equities (ESG and quality), or switching global credit exposures for infrastructure debt.”
He suggested that the macro trends — such as signs of a continued albeit slowing economic expansion, slightly higher medium-term inflation and high valuations across the broader market — should support cyclical and value stocks. The performance of cyclicals stocks tends to aligns with that of the global economy, while value stocks are often considered cheap relative to their financial fundamentals by investors.
