HSBC Holdings Plc’s headquarters building in Hong Kong, China.
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London – HSBC Asset Management has shared a wealth of advice with clients looking to navigate the current ‘wall of anxiety’ facing global markets.
With concerns about global growth and inflation causing tensions recently, along with the possibility of premature adjustments in central bank policy and a resurgence of Covid-19 in certain parts of the world, investors have a lot to do when deciding where to allocate funds.
In a letter to clients earlier this week, HSBC Asset Management’s chief global strategist Joe Little recommended a number of strategies, including looking at Asian fixed income, “reasonable inflation hedges”, value and cyclical stocks.
Consensus forecast for US GDP 2021 [gross domestic product] It was cut 0.7 percentage point to 5.9%, according to HSBC total, while supply chain disruptions pushed US inflation expectations for 2021 up a full percentage point to 4.3%.
Economists revised China’s 2021 GDP growth forecast to 8% (from a previous 2021 forecast of 8.6%) and Little noted that the third quarter was difficult for broader emerging market asset classes.
“Of course, the outlook depends on how growth and inflation affect current price concerns. The Covid-19 virus and supply chain disruption will remain challenges,” he said. “But we expect these factors to delay rather than derail the recovery. What could change the growth outlook is the political background,” he added.
HSBC expects GDP to grow in 2022 in major economies at around 4%-5.5%, with the US and Europe at the lower end of this range and the UK and China at the top. Meanwhile, the inflation rate is expected to rise to between 2-3%.
“But outside the major economies, there is significant divergence. Many emerging markets and frontier economies are lagging – all of which indicate that the global recovery is on two tracks,” he added.
In this environment, Little pointed to fixed income opportunities in emerging markets, but advised clients to be sensitive to the outlook for the dollar and this growing “double-track recovery.”
“Asian fixed income remains our preferred risk-adjusted bet in that region,” he added.
Low interest rates in the long term
As labor markets broadly continue to improve — weekly US jobless claims hit a new pandemic-era low of 290K last week, compared to 6.15 million in April 2020 — HSBC favors stocks over bonds, despite the proximity of stock markets. From its all-time high. Little has said that strong corporate profits will continue to be the “critical driver”.
“Our research points to a sustainable regime of low long-term interest rates, negative premium in global bonds, low risk premium in credits, and a seemingly neutral premium in international equities,” Little said.
“This means we need to be realistic: investment returns over the next 24 months will not match what we’ve seen over the past 12. However, we find it difficult to conclude that stocks are in bubble valuations so far.”
The risk premium is the amount of return an asset offers above the risk-free rate of return.
Although they are “not big believers” in a scenario in which transient inflation becomes “constant,” either because the labor supply does not return or because supply chains do not repair themselves, HSBC acknowledges that it presents a risk.
New data on Friday showed that inflation expectations in the euro zone reached an 8.5-year high, while the Bank of England’s chief economist warned that inflation in the UK could reach 5%. Inflation has also continued to rise in recent months, leading some analysts to believe that it will be more stable and widespread than the Federal Reserve had anticipated.
“This would mean that central banks were wrong on inflation, and therefore requires a sudden tightening of policy,” Little said. “As such, investors may consider affordable inflation hedges as an alternative to bonds,” Little said. In commodities, copper or carbon looks interesting. As for ‘real cash flow assets’, including defensive equities (ESG and quality), or global credit risk swaps to infrastructure debt.”
He noted that macro trends — such as signs of continued albeit slow economic expansion, a slight rise in medium-term inflation and higher valuations across the broader market — should support cyclical stocks and value. The performance of cyclical stocks tends to align with the performance of the global economy, while value stocks are often considered cheap compared to their financial fundamentals by investors.