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Positive on markets despite Omicron and higher rates

06/01/2022
Commodities
FX
Bonds
Global Equities

Key Takeaways

  • Policy normalisation is a sign of central banks’ confidence in the economy. Historically, stock markets have done well at the start of and during previous tightening cycles. 
  • Global growth should continue albeit at a slower pace in 2022. Asia remains our top geographic pick due to its favourable demographics and opportunities in the north and southeast regions.
  • Rising Omicron cases, high inflation and supply chain issues are key risks. Review your portfolio with a focus on large, high-quality companies. Explore long-term structural opportunities, such as green investing and digitalisation.

Talking Points

1. Can stocks rise further if rates go up?

  • Central banks have started a gradual normalisation process. The Federal Reserve will end its QE program in March thanks to a positive outlook and we now expect three 0.25% rate hikes in 2022. The Bank of England also raised its policy rate to 0.25% in December.
  • Our analysis of the six previous Fed tightening cycles show that the US equity market delivered an average return of 7.4% during the six months before tightening and 12.7% p.a. during the actual tightening process.
  • We expect stock market returns to stay positive thanks to a resilient economy and corporate profitability. Policy normalisation is a signal that the economy is strong enough to withstand higher interest rates. 

Source: Bloomberg, HSBC Private Banking as of 12/15/2021. Past performance is not a reliable indicator of future performance.

2. Will global growth be positive in 2022?

  • We expect global recovery to continue but growth will moderate this year (GDP forecast of 4.1% compared to 5.7% in 2021).
  • Equity returns will remain positive supported by solid earnings growth but pace will be slower. Interest rates, while likely to rise, are expected to stay low to sustain the economy. This favours equities and we prefer US, European and Asian equities.
  • Asia remains our top geographic pick because of its favourable demographics and opportunities in the north and southeast regions (e.g. Singapore, Malaysia and Indonesia). There is also room for a resurgence in consumption among its middle-income consumers. 

Source: HSBC Global Research, as of 5 January 2022. GDP aggregates use chain nominal GDP (USD) weights and inflation aggregates calculated using GDP PPP (USD) weights. 

3. How should investors structure their portfolio?

  • The new Omicron variant may keep markets volatile. Further, inflation concerns, supply chain disruption and upcoming elections all add uncertainty to the investment landscape.
  • Stay invested in equities but focus on large, high-quality companies that pay attractive dividends. Invest selectively in areas which benefit from long-term structural growth, such as sustainable investing and digitalisation. For the next 3 months, we also favour consumer discretionary and financials over industrials and materials sectors. For bonds, Global High Yield and Emerging Markets (USD) are our preferences.
  • It’s a good time to review your portfolio at the start of the year to ensure it remains diversified and resilient while capturing the growth opportunities.

Source: Refinitiv Datastream, as at 21 December 2021. Rebased to 100.

Note: Asset class performance is represented by different indices – Global Equities: MSCI World (USD); Global ESG stocks: MSCI ESG World Leaders (USD).

House views

 

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

Global

The outlook is still positive for equities although inflation, supply chain constraints and the new Omicron variant remain headwinds and may lead to market volatility in the short run. 

overweight
Overweight
Short-term
overweight

Overweight

Long-term
United States

Infrastructure, health technology and climate change spending support growth. US stocks provide a hedge against weaker growth and higher inflation due to its high quality characteristics and exposure to the digital economy.

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

Labour shortage, supply chain disruption, rate hikes, tax rises and Brexit related pressures pose short-term risks. Longer term, UK indices are heavily exposure to the value factors which offer upside potential.

Neutral
Neutral
Short-term
overweight

Overweight

Long-term
Eurozone

Rising Omicron cases and supply chain disruption are headwinds but the outlook of the region remains constructive. The economic recovery is supported by the EU Next Generation grants and loans but further upside is limited.

Overweight
Overweight
Short-term
overweight

Overweight

Long-term
Japan

Japan benefits from good earnings performance and a decent macro outlook as vaccination accelerates and global capex spending increases. The uncertainty of the structural reforms under the new government is to be seen.

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

Policy headwinds and challenges in vaccine distribution are likely to weigh on EM equities. Valuations are not particularly cheap. EM fixed income valuations are more attractive.

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

Higher commodity prices have benefited Latin America recently but we do not see further upside. Longer term, the new virus variants, slow vaccine rollout and relatively constrained policy space remain key challenges.

Underweight
Underweight
Short-term
Neutral
Neutral
Long-term

Asian ex-Japan

Favourable demographics and positive structural opportunities in the north and southeast regions (e.g. Singapore, Malaysia and Indonesia) such as sustainable investing and digitalisation should support growth. Longer-term, policy normalisation and regulatory headwinds are to be monitored. 

overweight
Overweight
Short-term
Neutral
Neutral
Long-term
China

We expect more favourable policies to support the strategic growth model with focus on capex spending in high-end manufacturing and green investments. Moderating domestic growth and regulatory uncertainty are key concerns.

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
India

India’s economy benefits from market reopening. The medium-term growth outlook remains intact amid continued fiscal support, and recent progress with land and labour reforms. Valuations remain stretched. 

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

The economy is being hit by the restrictions of tourism from mainland China and other markets. However, Hong Kong remains an attractive listing hub underpinned by greater primary and secondary market activity.

 Neutral
Neutral
Short-term
 Neutral
Overweight
Long-term
Singapore

Singapore benefits from being home to high-quality companies supported by the government in the tech space.  

overweight
Overweight
Short-term
overweight

Overweight

Long-term
South Korea

Korea can offer exposure to electric vehicle and battery themes, but exposure to growth stocks implies vulnerability to higher global bond yields. A tighter monetary policy outlook further weighs on valuations.

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Taiwan

Global recovery and demand growth in tech, 5G and semi-conductors warrant our positive stance. Taiwan equities have significant exposure to growth/tech sectors which are sensitive to US yields. Geopolitical risks remain.

Overweight
Overweight
Short-term
Neutral
Neutral
Long-term

Developed markets (DM)

Valuations have recently improved amid a repricing of inflation and interest rate risks, but both valuations and  yields are still not attractive.

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

Further upside in US Treasuries yields are unlikely given the pricing in of inflation risks and the Fed’s normalisation plans. The pick-up in yields has improved longer-dated Treasuries but we remain neutral short term.

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

Inflation pressures amid supply chain disruption support policy tightening. Risk-adjusted returns look poor.

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
Eurozone

Prospective returns and diversification benefits are limited. The ECB’s bond-buying is also set to decrease in 2022.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
Japan

Given Bank of Japan’s accommodative policy stance, government bonds yields are likely to remain low. 

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

The EM currency component in the asset class adds to its volatility as US dollar is expected to strengthen. Longer term, prospective returns are relatively high due to EM currencies being undervalued. Being selective is key.

Neutral
Neutral
Short-term
overweight

Overweight

Long-term
Emerging Markets (Hard currency)

This asset class is supported by attractive yields and USD strength, with resilient quality names preferred. Longer term, prospective returns do not compensate for risks such as limited EM policy space and vaccine challenges.

overweight
Overweight
Short-term
Neutral
Neutral
Long-term

Global investment grade (IG)

Prospective returns are still unattractive, particularly for longer-duration bonds. We remain defensive and are more positive on shorter-duration bonds and Asia IG.

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

Valuations are relatively unattractive especially for longer duration bonds. 

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

Spreads are at historically tight levels and it is important to monitor trends in corporate fundamentals. The ECB is still engaged in substantial corporate bond purchases and the GDP growth should remain robust in the coming quarters. 

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

Asia investment grade offers quality names and issuers with strong implicit government support.

overweight
Overweight
Short-term
overweight

Overweight

Long-term
Global high-yield (HY)

US Treasury yields will stay “low but volatile” as markets look for clues about the tapering plan. We prefer short-dated Global High Yield to mitigate interest rate volatility. Default-adjusted spreads are at multi-year lows.

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

High energy prices have boosted the cash flows of oil & gas companies, which is a major constituent of the USD HY index. Longer term, spreads are at levels consistent with an underweight view.

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

Monetary policy is ultra-accommodative, including ECB measures to support the market. However, valuations support our long-term underweight position.

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

Default rates should remain low and spreads look relatively attractive. China’s economy and default rates need to be monitored in the context of tightening policy, deleveraging efforts and regulatory pressures.

overweight
Overweight
Short-term
overweight

Overweight

Long-term

Gold

Gold offers diversification and hedging benefits but further upside is limited by higher bond yields, a stronger USD, and a reduction in global economic and geopolitical uncertainty.

overweight
Neutral
Short-term
 Neutral
Neutral
Long-term
Oil

Near-term demand is strong and oil prices are expected to drop in 2022 with the US and OPEC+ resuming supply. But the outlook for global spare capacity is a concern over a longer term.

 Neutral
Neutral
Short-term
 Neutral
Neutral
Long-term

Sector Views

 

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

Rising wages, robust employment prospects, high levels of savings and lower debt levels support consumer sentiment. We expect further upward earnings revisions. Domestic travel and hospitality is being hit by the Omicron variant restrictions, while auto makers see robust demand but production is constrained by supplies chain issues, especially semi-conductors.

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

Banking stocks benefit from inflationary pressures lifting rate hike expectations. The economic outlook is positive on stimulus packages in the US and Europe, low valuations, as well as higher trading revenues and M&A activity. Another strong set of quarterly results has exceeded expectations on higher capital markets activity, lower loan provisions and a hot real estate market.

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

Rising input costs (labour, materials and energy) and supply chain issues continue to weigh on margins and profits for the coming quarters. Historically, low inventories and the shift to greater automation ensure future potential once the immediate issues are addressed.

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

The trend of digitalisation and new technologies driving long-term, above-average growth remains intact. Shortage in semi-conductors is still challenging but infrastructure spending should benefit digital infrastructure. Regulatory authority actions could potentially weigh on sentiment but the focus has shifted from the US to Asian companies.

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

Steady cash flows and increased data usage as more activity shifted online and business digitalised are key drivers. The 5G roll-out is positive for telecom equipment providers but is neutral/negative initially for service providers. Media companies see continued robust demand.

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

The constructive economic outlook is reflected in valuations. Metal prices continue to loose momentum. In the medium term as infrastructure spending related to fiscal stimulus plans in Europe, Asia and the US, demand is likely to grow.

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

High savings and low interest rates are positive for private residential real estate, while commercial real estate is suffering from corporates looking to reduce office space and retail moving online. High dividend yield provides attraction in a low yield environment.

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

Valuations are comparable or higher than some of the cyclical sectors following recent decline in some cyclical sectors. Single digit YoY earning growth is expected as inflationary pressure drive higher input material cost and labour shortage may hurt margins in some industries.

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

Energy prices and stocks will remain volatile. Low inventories and supply-demand imbalances will likely keep prices high. In the medium term, continuing chronic under-investment will support prices despite the clean energy transition gaining momentum. 

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

Medical technology companies stand to benefit from large backlogs in elective surgical procedures, while new innovative medicines drive sales and positive news flow for the biotechnology sector. Pricing remains a headwind for pharmaceutical companies due to policy and regulations.

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

Renewable stocks look more attractive after stock prices and valuation pulled back significantly from overly optimistic levels. However, margins may be under pressure as companies may not be able to pass on rising energy prices.

Global
Global
Underweight
US
US
Underweight
Europe
Europe
Neutral
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

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