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House views

20/04/2020

Macro Outlook

  • Governments are imposing ever-more restrictive measures to suppress COVID-19, which is imposinga heavy toll on economic activity
  • Unemployment is increasingat an unprecedentedpace in many economies
  • Q2 could see double-digit declines in GDP growth across developed economies, far worse than seen in the global financial crisis of 2008-09
  • China, however, is showing signs of gradual recovery in activity levels as the government eases restrictions
  • The path for the global economy through 2020 is highly dependent on governments’ willingness to maintain virus-suppression policies

Investment views

While the COVID-19 pandemic represents a very significant challenge for the global economy, the recent sell-off has materially increased our measure of prospective returns

Our measure of the global equity risk premium (excess return over cash) now looks very attractive. After the recent sharp falls in developed market government bond yields, the relative attractiveness of equities over bonds has increased further

A much looser global policy setting means there is scope for a recovery in risk assets as global economic conditions stabilise 

COVID-19 presents big challenges to the economic outlook. However, policymakers have acted in a timely and coordinated manner. This should support an economic recovery as the disruption from the virus dissipates. Corporate earnings have also been outperforming other regions

Since the sharp sell-off in March, valuations has improved substantially in our opinion. Current market pricing offers buying opportunities for investors with a long-term investment horizon

The repricing of eurozone equities experienced in March has created very attractive prospective risk-adjusted returns

The European Central Bank has been proactive and innovative in its policy approach to support bank liquidity and lending to the real economy, and has increased asset purchases. The German government has engaged in very significant fiscal easing

The UK equity risk premium (excess return over cash) has substantially increased as a result of the sell-off in March and remains comfortably above that for other developed market (DM) equities

The UK government and the Bank of England have introduced a comprehensive and coordinated package of economic stimulus measures aimed at supporting businesses and employment

Valuations are very attractive, especially since the sharp sell-off in March

In response to the COVID-19 disruption, Japanese authorities have implemented policy easing, including a sizeable fiscal stimulus package and liquidity measures/asset purchases by the Bank of Japan

Large corporate cash reserves provide firms with the scope to boost dividends or engage in stock repurchases

Emerging market equities tend to outperform on the back of Chinese stimulus. We continue to prefer Asian markets

The structural characteristics of EM economies are better than in the past. EMs have more policy space to help stabilise economic conditions relative to developed markets. Fed policy easing and lower oil prices are significant tail-winds to many EM economies

The recent sharp fall in oil and other commodity prices is a major headwind to already weak growth momentum in Latin America and Russia. CEE economies are vulnerable to a manufacturing slowdown in Europe given supply chains

We think high local interest rates and sovereign yields in select countries diminish the case for bearing equity risk

  • Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout March 2020, HSBC Global Asset Management’s long-term expected return forecasts which were generated as at 28 February 2020, our portfolio optimisation process and actual portfolio positions.
  • Underweight, overweight and neutral classifications are the high-level asset allocations tilts applied in diversified, typically multi-asset portfolios, which reflect a combination of our long-term valuation signals, our shorter-term cyclical views and actual positioning in portfolios. The views are expressed with reference to global portfolios. However, individual portfolio positions may vary according to mandate, benchmark, risk profile and the availability and riskiness of individual asset classes in different regions.

An upward sloping (⬆) “Overweight” implies that, within the context of a well-diversified, typically multi-asset portfolio, and relative to relevant internal or external benchmarks, HSBC Global Asset Management has (or would have) a positive tilt towards the asset class.

A downward sloping (⬇) “Underweight” implies that, within the context of a well-diversified, typically multi-asset portfolio, and relative to relevant internal or external benchmarks, HSBC Global Asset Management has (or would have) a negative tilt towards the asset class.

A sideways arrow (➡) “Neutral” implies that, within the context of a well-diversified, typically multi-asset portfolio, and relative to relevant internal or external benchmarks, HSBC Global Asset Management has (or would have) neither a particularly negative nor a positive tilt towards the asset class.

  • For global investment-grade corporate bonds, the underweight, overweight and neutral categories for the asset class at the aggregate level are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, USD investment-grade corporate bonds and EUR and GBP investment-grade corporate bonds are determined relative to the global investment-grade corporate bond universe.
  • For Asia ex Japan equities, the underweight, overweight and neutral categories for the region at the aggregate level are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, individual country views are determined relative to the Asia ex Japan equities universe as of 28 February 2020.
  • Similarly, for EM government bonds, the underweight, overweight and neutral categories for the asset class at the aggregate level are also based on high-level asset allocation considerations applied in diversified, typically multi-asset portfolios. However, EM Asian Fixed income views are determined relative to the EM government bonds (hard currency) universe as of 31 March 2020.

 

Source: HSBC Global Asset Management. As at 1 April 2020. The views expressed were held at the time of preparation, and are subject to change.

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