Top of main content

Stay invested but be (portfolio) resilient

02/09/2021
Commodities
FX
Bonds
Global Equities

Key Takeaways

  • We remain positive on the stock market and other cyclical investments like high yield bonds but portfolio resilience will be key.
  • Risks including Covid-19 and central bank tightening mean we have a renewed focus on high quality companies in portfolios. We favor large-cap, high quality companies that pay attractive dividends.
  • We still prefer US, UK and Asian equities which should rally further, driven by strong earnings. Short-term, we upgraded European equities to Overweight thanks to strong growth momentum in the region. 

Talking Points

1.Why does ESG matter even more now?

  • The UN's climate change authority (IPCC) has confirmed the climate has changed and attributed by human activity. At the current rate, temperatures will rise by 1.5 degrees (from pre-industrial levels) by 2040. Reaching and surpassing the 1.5-degree threshold means more frequent and severe extreme weather.
  • Adaptation is critical. For example, better flood and fire management measures caused by extreme rainfall or heat. But mitigating the temperature rises is the key. The damage caused by going beyond 1.5 degrees can be managed if we achieve Net Zero emissions by 2050.
  • Financial markets will reward companies better adapted to the sustainability revolution. Broader investor and consumer appeal in sustainable companies may enhance earnings, lower costs of capital and reward them with higher valuation multiples. 

Source: Bloomberg, data as of 24 Aug 2021

Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

2. Can stocks push higher and why portfolio resilience?

  • We think stocks can rally further. In addition to our preferences for US, UK and Asia, we have upgraded Europe equities to Overweight due to the region’s strong growth momentum and Europe GDP forecasts from 4.4% to 4.9% for 2021. Sentiment is high and the European Central Bank has emphasised its commitment to stimulate the recovery.
  • There are 2 key risks to our positive outlook. First, market volatility is possible depending on how delicately the Fed handles its messaging around the tapering of quantitative easing. Second, Covid-19 remains a risk to the recovery even though our base case is that vaccine progress allows the recovery to continue.
  • Our focus is on large, high quality companies that are more resilient in the face of volatility. In particular, we like those companies that also pay attractive dividends. This is especially compelling in a low-yield world. 

Source: Refinitiv Datastream, Data as of 25 Aug 2021.

Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

3. What is the outlook for Asia?

  • Recent Asian equities weakness has been driven by  new Covid-19 cases. Despite this, we remain positive on Asian investments. Over the next 3-6 months, we remain Overweight Asian equities and see opportunities particularly in Singapore and Taiwan. Both markets benefit from the recovery and favourable supply/demand dynamics in semi-conductors.
  • We believe Chinese equities have a place in portfolios as a structural long-term investment. However, we have a Neutral allocation in the short-term because of ongoing regulatory risks. 
  • On fixed income, investors can gain exposure to more attractive yields through Asian high yield bonds and EM debt, in particular Asia and China credits. 

Source: Refinitiv Datastream, Data as of 26 July 2021.

Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

House views

 

Our latest short-term (3-6 months) and long-term (>12 months) views on various asset classes

Global

Equity markets have the scope to rally further but momentum and scale may reduce, hence we focus on quality, large-cap names that have robust balance sheets, sound business models and strong cash flows to pay dividends. 

overweight
Overweight
Short-term
overweight

Overweight

Long-term
United States

We remain overweight US equities on strong profitability, exposure to quality and mega-cap tech stocks. Inflation risks should subside as supply picks up. The normalisation of monetary policy should be gradual with supportive fiscal policies. We prefer exposure to financials, technology, consumer discretionary and real estate.

overweight
Overweight
Short-term
Neutral
Neutral
Long-term
United Kingdom

Whilst we remain positive on UK’s leading vaccine progress and strong re-opening dynamics, there are fewer reasons for the markets to outperform in the near-term hence we equalised our views between UK and Eurozone.

overweight
Overweight
Short-term
overweight

Overweight

Long-term
Eurozone

We lifted Europe GDP forecast from 4.4% to 4.9% on strong economic momentum and a supportive ECB, subsequently we upgraded European equities to overweight but strong rally YTD could cap upside.

Overweight
Overweight
Short-term
overweight

Overweight

Long-term
Japan

We upgraded Japan equities on value as long-term prospects are improving on domestic recovery, strong export and global cyclical exposure. They underperformed US and Eurozone despite its earnings recovery.

 Neutral
Neutral
Short-term
Overweight
Overweight
Long-term
Emerging Markets (EM)

USD has been strengthening which may put pressure on EM currencies. ASEAN underperformed due to wide-spread Covid cases and the region’s economic reliance on tourism but there is scope to catch up once Covid clears.

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Central & Eastern Europe and Latin America

EMs outside of Asia face headwinds from low vaccination rates to political uncertainty. Russia and some countries in Latin America have already started to lift interest rates, which could weigh on corporate profitability and equity valuations. 

Underweight
Underweight
Short-term
Neutral
Neutral
Long-term

Asian ex-Japan

The structural growth story remains. A key reason of our less bullish LT view on Asia ex Japan is due to our downgrade of China, which accounts for almost 40% of stocks in the index. Slow vaccination and low mobility hurts economic recovery in some parts of the region.

overweight
Overweight
Short-term
Neutral
Neutral
Long-term
China

On-going regulatory risks in China lead us to take a neutral stance over both the short and long-term. Valuations are not particularly cheap but we still think there are merits to investing in China structurally in the long run. 

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
India

Indian equities notably outperformed since the second wave sell-off and more than doubled from the low point in late March of 2020, outperforming emerging markets by 50% in dollar terms but valuations are high.

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Hong Kong

There are a lack of positive catalysts in the near term but we are positive on HK equities in the longer run due to its cyclical exposure. It remains an attractive listing hub for access to China onshore and offshore equities. 

 Neutral
Neutral
Short-term
 Neutral
Overweight
Long-term
Singapore

Singapore is a key beneficiary from global rotation into cyclical and manufacturing sectors, and leads in vaccination. 

overweight
Overweight
Short-term
overweight

Overweight

Long-term
South Korea

Korea gives beta exposure to growth via EV and tech, but is challenged by elevated Covid cases and high valuation.

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Taiwan

Taiwan benefits from structural digital demand in semi-conductors and 5G but we are neutral on high valuation. 

Overweight
Overweight
Short-term
Neutral
Neutral
Long-term

Developed markets (DM)

US Treasury yields have stabilised at below 1.3% as at 31 August and negative bond yields are still unappealing for key government bonds including Japan, German and UK.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
United States

The Fed will begin ‘tapering’ in 4Q 2021 or 1Q 2022, and will ‘normalise’ rates. Credit spreads and valuations are tight. We prefer short duration and quality bonds to mitigate risks such as Covid and inflation.

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
United Kingdom

The BoE is supportive in the near term and there is scope for stronger-than-expected UK economic recovery.  However prospective risk-adjusted returns and gilt yields are unattractive in the long term. 

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
Eurozone

The ECB is supportive of the markets and default rates should fall towards 2-4% range, but policy rates are likely to remain at or below -0.5% until the 2% inflation target is met.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
Japan

Japanese government bonds (JGBs) are overvalued and the bond risk premium remains negative.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
Emerging Markets (local currency)

Our positive stance on EM debt is unchanged on higher yields and undervalued EM currencies. Being defensive and resilient is key as risks emerge in certain issuers and countries including China’s state-owned issuers.

overweight
Overweight
Short-term
overweight

Overweight

Long-term
Emerging Markets (Hard currency)

Prospective returns are relatively high as EM government bond yields are attractive, and EM fixed income valuations are more attractive than EM equities.

overweight
Overweight
Short-term
 Underweight
Underweight
Long-term

Global investment grade (IG)

We moved global and US IG to neutral along with the Fed’s hawkish tilt and projection of inflation being transitory, but it remains important for investors to continue to have an allocation to IG for portfolio diversification reasons. 

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
USD investment grade (IG)

Long-term US Treasury yields have tightened, IG bonds spreads are compressed and we took profits.

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
EUR and GBP investment grade (IG)

Europe and UK economies are catching up on economic recovery as the re-opening continues but spreads and returns are unattractive. Meanwhile, we keep a close watch on corporate fundamentals and Delta variants.

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
Asia investment grade (IG)

Asian credit remains attractive on higher yields and strong fundamentals. 

overweight
Overweight
Short-term
overweight

Overweight

Long-term
Global high-yield (HY)

In the near-term, we are still positive due to higher real yields and earnings. We downgraded HY for the long term as default-adjusted spreads are at multi-year lows and uncertainties remain, implying an asymmetric return profile.

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
US high-yield (HY)

The US economy is performing well on re-opening, stimulus and low rates. Whilst we are positive in the short run, we are cautious on rising default rates and tight spreads in the long term. 

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
European high-yield ex UK (HY)

Ultra easy ECB monetary policy and accelerating EU’s vaccine rollout are positive factors, though valuations are not attractive and corporate fundamentals could be fragile in the long run.

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
Asia high-yield (HY)

Asia HY benefits from robust macro trends in the region and strong investor demand. Although default rates are rising amid tightening policy in China, spreads look more interesting relative to other global opportunities.

overweight
Overweight
Short-term
overweight

Overweight

Long-term

Gold

Softer US bond yields, low real rates and declining geopolitical risks can support gold, but price upside is limited.

overweight
Neutral
Short-term
 Neutral
Neutral
Long-term
Oil

Oil is supported by disciplined supply by OPEC and allied producers, as well as a positive demand outlook.

 Neutral
Neutral
Short-term
 Neutral
Neutral
Long-term

Sector Views

 

Global and regional sector views based on a 3-6 month horizon

Consumer discretionary spending continues to rebound as economies re-open, bolstered by record high savings, falling debt levels and pent-up demand. This would benefit auto, luxury, hospitality and restaurants, with further earnings upside as consumer sentiment improves.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Overweight
Asia
Asia
Overweight

Stimulus packages in the US and Europe can help offset a persistently lower interest rates environment. Financials sector valuations are not demanding, banks have resumed paying dividends whilst 2Q 2021 earnings beat is encouraging. Other catalysts are strong capital markets activity, lower loan provisions, high savings rate and a hot real estate market. 

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Overweight
Asia
Asia
Neutral

Industrial stocks have rallied strongly over the last 12 months  in anticipation of a demand rebound as economies re-open and the need to rebuild inventories. Concerns of slowing Chinese economy, rising input costs and supply chain issues are weighing on sentiment. Europe is starting to gain momentum but the supply chain issues may provide a headwind. 

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Overweight
Asia
Asia
Neutral

We became more constructive on US IT as valuations are now more reasonable. Long-term structural play in digitalisation and innovative technologies is firmly in place. Despite semiconductor and chip shortage, hardware, cloud, automation and 5G should benefit from rebound in economic activity.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

The sector benefits from continuous growth from digitalisation of businesses and way of life. Media companies are likely to see continued robust demand. The 5G roll-out is positive for telecom equipment provider but neutral/negative initially for service providers.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

The economic outlook remains constructive but this is somewhat reflected in valuations. In the medium term, demand is likely to grow as infrastructure spending related to fiscal stimulus continues in Europe, Asia and the US, but the current cycle may be close to peaking in the near term. 

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Overweight
Asia
Asia
Neutral

High savings and lower interest rates support strong demand for private housing, while commercial property suffers low demand as companies look to reduce office space and retail moves online. REITs provide attractive dividends in a low yield world. 

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

Staples tend to underperform during periods of rapid economic recovery. After the surge in ‘panic purchases’ of consumer necessities at the outset of Covid, the sector continues to face headwinds in 2021 as investors reduce defensive exposure for a more cyclical sector bias. Rising input costs and labour shortage may hurt margins in some industries. 

Global
Global
Underweight
US
US
Underweight
Europe
Europe
Underweight
Asia
Asia
Underweight

Oil prices are supported by tight supply and demand rebounding to approach pre-pandemic levels as economies re-open. We expect further volatility in energy prices and stocks with ongoing narrative of geopolitics. Oil prices have rallied almost 50% from March 2020 trough to peak at US$75/bbl (on 13/7/2021) and have stabilised at around US$80/bbl (on 31/8/2021).

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Neutral
Asia
Asia
Neutral

Healthcare spending should remain a priority, and medical technology and biotechnology companies are preferred. However, the sector is subject to regulatory and reforms risks (e.g. pricing pressure in the US when Covid is contained), such that stocks may see some volatility. 

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Neutral
Asia
Asia

Neutral

 

Various green initiatives provide short-term potential and the sector can add resilience to tactical portfolio allocation in a volatile environment,  but utilities as a defensive sector is likely to underperform in the cyclical recovery. The sector appears less likely to fall prey to the next potential regulatory crackdown in China. 

Global
Global
Underweight
US
US
Underweight
Europe
Europe
Underweight
Asia
Asia
Underweight

 

Overweight” implies a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

Underweight” implies a negative tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

Neutral” implies neither a particularly negative nor a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

View on this asset class has been upgraded

View on this asset class has been downgraded

This document or video is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document or video is distributed and/or made available by HSBC Bank Canada (including one or more of its subsidiaries HSBC Investment Funds (Canada) Inc. (“HIFC”), HSBC Private Investment Counsel (Canada) Inc. (“HPIC”) and HSBC InvestDirect division of HSBC Securities (Canada) Inc. (“HIDC”)), HSBC Bank (China) Company Limited, HSBC Continental Europe, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited (UAE), HSBC UK Bank Plc, HSBC Bank Malaysia Berhad (127776-V)/HSBC Amanah Malaysia Berhad (807705-X), HSBC Bank (Taiwan) Limited, HSBC Bank plc, Jersey Branch, HSBC Bank plc, Guernsey Branch, HSBC Bank plc in the Isle of Man, HSBC Continental Europe, Greece, The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India), HSBC Bank (Vietnam) Limited, PT Bank HSBC Indonesia (HBID) and HSBC Bank (Uruguay) S.A. (HSBC Uruguay is authorised and oversought by Banco Central del Uruguay), (collectively, the “Distributors”) to their respective clients. This document or video is for general circulation and information purposes only.

The contents of this document or video may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document or video must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document or video will be the responsibility of the user and may lead to legal proceedings. The material contained in this document or video is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document or video may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. HBAP and the Distributors do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document or video has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed are based on the HSBC Global Investment Committee at the time of preparation, and are subject to change at any time. These views may not necessarily indicate HSBC Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document or video is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Investments are subject to market risks, read all investment related documents carefully.

This document or video provides a high level overview of the recent economic environment and has been prepared for information purposes only. The views presented are those of HBAP and are based on HBAP’s global views and may not necessarily align with the distributors’ local views. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Before you make any investment decision, you may wish to consult a financial adviser. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether the investment product is suitable for you. You are advised to obtain appropriate professional advice where necessary.

We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.

Important Information about HSBC Global Asset Management (Canada) Limited (“AMCA”)

HSBC Asset Management is a group of companies, including AMCA, that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings plc. AMCA is a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.

Important Information about HSBC Investment Funds (Canada) Inc. (“HIFC”)

HIFC is the principal distributor of the HSBC Mutual Funds and offers the HSBC Mutual Funds and/or the HSBC Pooled Funds through the HSBC World Selection® Portfolio service. HIFC is a subsidiary of AMCA, and indirect subsidiary of HSBC Bank Canada, and provides its products and services in all provinces of Canada except Prince Edward Island. Mutual fund investments are subject to risks. Please read the Fund Facts before investing.

®World Selection is a registered trademark of HSBC Group Management Services Limited.

Important Information about HSBC Private Investment Counsel (Canada) Inc. (“HPIC”)

HPIC is a direct subsidiary of HSBC Bank Canada and provides services in all provinces of Canada except Prince Edward Island. The Private Investment Counsel service is a discretionary portfolio management service offered by HPIC. Under this discretionary service, assets of participating clients will be invested by HPIC or its delegated portfolio manager, AMCA, in securities, including but not limited to, stocks, bonds, mutual funds, pooled funds and derivatives. The value of an investment in or purchased as part of the Private Investment Counsel service may change frequently and past performance may not be repeated.

Important Information about HSBC InvestDirect (“HIDC”)

HIDC is a division of HSBC Securities (Canada) Inc., a direct subsidiary of, but separate entity from, HSBC Bank Canada. HIDC is an order execution only service. HIDC will not conduct suitability assessments of client account holdings or of the orders submitted by clients or from anyone authorized to trade on the client’s behalf. Clients have the sole responsibility for their investment decisions and securities transactions.

The following statement is only applicable to HSBC Bank (Taiwan) Limited with regard to how the publication is distributed to its customers: HSBC Bank (Taiwan) Limited (“the Bank”) shall fulfill the fiduciary duty act as a reasonable person once in exercising offering/conducting ordinary care in offering trust services/ business. However, the Bank disclaims any guarantee on the management or operation performance of the trust business.

THE CONTENTS OF THIS DOCUMENT OR VIDEO HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION.

YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT OR VIDEO. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT OR VIDEO, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.

© Copyright 2021. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.

No part of this document or video may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.