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Age of Uncertainty: COVID-19

06/03/2020
Commodities
FX
Bonds
Global Equities

Summary

Macro Outlook

  • Global growth showed signs of picking up in late-2019, particularly in emerging markets with momentum in China building gradually since the summer. But the outbreak of COVID-19 will reverse this momentum
  • China’s growth rate is likely to be negative in Q1 versus the previous quarter. Countries with large economic linkages to China and with limited scope for policy support look vulnerable, such as the eurozone and Japan
  • Positively, however, the US economy seems best insulated from the virus, with consumers in good financial health amid a robust labour market
  • We also see policy supporting economies. Fed rate cuts are an option. Chinese authorities have already eased monetary policy, among other measures. We expect other economies to roll out similar initiatives to support growth

Key Views

  • Risk-assets globally have faced some pressure following the outbreak of COVID-19, first in China and now more globally. Again, episodic volatility is a feature, not a bug, of the “age of uncertainty”
  • Risk asset classes like global equities continue to offer a relative high risk premium versus “safety” asset classes like global bonds
  • While COVID-19 is likely to deliver a significant hit to global activity, it can be relatively short-lived. Automatically adopting risk-off investment strategies may prove costly given current market pricing
  • However, we need to monitor developments closely, with particular attention on: trends in corporate earnings and default rates, COVID-19 case growth, and high-frequency Chinese activity data
  • Indeed, we acknowledge there are limits to what policy easing can achieve if lockdowns and supply chain disruptions persist or become widespread

Key Risks

Central Banks

  • The bar for a rate cut by the US Federal Reserve (Fed) is far lower than for a rate hike, especially given the downside risks from COVID-19
  • The European Central Bank (ECB) could engage in more aggressive QE and/or deposit rate cuts amid the economic impact of COVID-19
  • The Bank of England (BoE) voted 7-2 to keep rates on hold in January, but policy easing remains possible amid Brexit and COVID-19 uncertainty
  • Following a sharp economic contraction in Q4 and risks from COVID-19, the Bank of Japan (BoJ) is likely to ease; although they remain fairly constrained
  • The People’s Bank Of China (PBOC) has been easing monetary policy in response to the outbreak of COVID-19 in China – we expect this to continue until activity has recovered

 

Source: HSBC Global Asset Management, Global Investment Strategy, March 2020

All numbers rounded to one decimal place. The views expressed were held at the time of preparation, and are subject to change.

Investment Views

The recent COVID-19 outbreak has raised volatility in markets. Despite short-term economic challenges, global policy stimulus is likely to help cushion the blow to the global economy and financial markets. For now, we still favour a pro-risk investment strategy

  • Global equities – We remain overweight given the wide valuation gap versus bonds. Whilst short-term performance has been hit by the spread of COVID-19, downside potential is likely limited by proactive policy makers
  • Government bonds – Valuations are relatively unattractive and policy is moving toward fiscal stimulus. We prefer inflation-linked bonds
  • Corporate bonds – Most credit asset classes are overvalued in our view and corporate fundamentals are coming under pressure. We prefer equities
  • The COVID-19 situation is very fluid and we are monitoring high frequency macroeconomic/corporate fundamentals data and market trends very closely. We will communicate any portfolio changes through our usual macro and investment strategy communications suite

Source: HSBC Global Asset Management, as at March 2020, and subject to change.

Asset Class Performance at a glance

Global equities fell in February as a rally earlier in the month following a fall in new cases of COVID-19 in China was offset by fears of a pandemic following a jump in new cases more globally

  • Government bonds – Large gains were made as investors priced in further policy easing by the US FOMC and other global central banks amid COVID-19 concerns
  • Commodities – Oil prices slumped as investors priced in a worsening global economic outlook; gold prices made further gains amid increased demand for perceived safe-haven assets

Past performance is not an indication of future performance

Note: Asset class performance is represented by different indices.

Global Equities: MSCI ACWI Net Total Return USD Index. Global Emerging Market Equities: MSCI Emerging Market Net Total Return USD Index. Corporate Bonds: Bloomberg Barclays Global HY Total Return Index value unhedged. Bloomberg Barclays Global IG Total Return Index unhedged. Government bonds: Bloomberg Barclays Global Aggregate Treasuries Total Return Index. JP Morgan EMBI Global Total Return local currency. Commodities and real estate:  Gold Spot $/OZ/ Other commodities: S&P GSCI Total Return CME. Real Estate: FTSE EPRA/NAREIT Global Index TR USD.

Source: Bloomberg, all data above as of close of 28 February 2019 in USD, total return, month-to-date terms

Base case views and implications

US

Monthly macroeconomic update

  • Loose monetary policy, a robust labour market, and solid household fundamentals are supporting domestic consumption
  • The economy remains relatively well insulated from developments abroad, but tail risks from COVID-19 exist. In the near-term, manufacturing, business investment and exports are exposed to weaker demand and supply chain disruptions

Base case view and implications

  • The US economy is likely to grow moderately this year as fiscal stimulus wanes and the labour market matures
  • Fed policy looks to be on hold but risks are largely tilted to the downside – loosening this year remains plausible
  • US Treasury valuations are high and inflation risks are dismissed. Equities and inflation-linked bonds are preferable

Europe

Monthly macroeconomic update

  • Eurozone: COVID-19 is expected to hit the economy via potential containment measures, while manufacturing will be hit by weaker Chinese demand and supply chain disruptions
  • UK: Brexit and political uncertainty has negatively impacted confidence and growth, but fiscal spending and looser monetary policy stands ready to offset this

Base case view and implications

  • Eurozone: European equities remain relatively cheap, although we acknowledge headwinds from weak growth
  • UK: We continue to have a overweight view on UK equities given very attractive valuations

Asia

Monthly macroeconomic update

  • China: The impact of COVID-19 is likely to have a significant impact on growth in the short-term. There is also uncertainty about how long the disruption will persist
  • India: Private sector activity data continues to be weak, although policy easing efforts have been stepped up. Domestic consumption growth may be bottoming
  • Japan: Economic data has weakened significantly following a VAT tax hike in Q4 2019 and a particularly bad typhoon season; COVID-19 is a key headwind

Base case view and implications

  • China: Ongoing policy loosening will act in an attempt to support the Chinese economy
  • India: The long-term structural growth potential remains positive, supporting our overweight view
  • Japan: We believe the valuation of Japanese equities is still attractive, although weak economic growth creates challenges

Other EM

Monthly macroeconomic update

  • Brazil: Positive reform momentum and improving financial conditions could support growth. Monetary policy easing should support growth
  • Russia: Activity remains sluggish, amid subdued domestic demand. Recent monetary easing and planned infrastructure projects are likely to support growth
  • MENA: Growth prospects are constrained by elevated geopolitical risks, oil price falls and production cuts, and weaker global growth amid the COVID-19 outbreak

Base case view and implications

  • EMs could see short-term disruption to their economies given the measures taken by China to halt the spread of COVID-19
  • But this is likely to be temporary. The backdrop for EMs is supported by the Fed’s easing bias, China policy stimulus, and more accommodative EM central banks/fiscal policy
  • We remain overweight EM equities

Source: HSBC Global Asset Management. As at 2 March 2020. The views expressed were held at the time of preparation, and are subject to change.

Long-term Asset class positioning tables (>12 months)

Equities

Government Bonds

Investment grade corporate Bonds

High-yield corporate Bonds

Alternatives

Asian assets

Source: HSBC Global Asset Management. As at 2 March 2020. The views expressed were held at the time of preparation, and are subject to change.

This commentary has been produced by HSBC Global Asset Management to provide a high level overview of the recent economic and financial market environment, and is for information purposes only. The views expressed were held at the time of preparation; are subject to change without notice and may not reflect the views expressed in other HSBC Group communications or strategies. This marketing communication does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. The content 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. You should be aware that the value of any investment can go down as well as up and investors may not get back the amount originally invested. Furthermore, any investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in established markets. Any performance information shown refers to the past and should not be seen as an indication of future returns. You should always consider seeking professional advice when thinking about undertaking any form of investment.

February 2020

*Indices expressed as total returns. All others are price returns.

All total returns quoted in USD terms.

Data sourced from MSCI AC World Total Return Index, MSCI USA Total Return Index, MSCI AC Europe Total Return Index, MSCI AC Asia Pacific ex Japan Total Return Index, MSCI Japan Total Return Index, MSCI Latam Total Return Index and MSCI Emerging Markets Total Return Index.

Total return includes income from dividends and interest as well as appreciation or depreciation in the price of an asset over the given period

Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 28 February 2020

Past performance is not an indication of future returns.

  • Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout February 2020, HSBC Global Asset Management’s long-term expected return forecasts which were generated as at 31 January 2020, our portfolio optimisation process and actual portfolio positions.
  • Icons:  ⬆ View on this asset class has been upgraded     – No change     ⬇ View on this asset class has been downgraded
  • 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.
  • “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.
  • “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.
  • “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 or 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 31 January 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 28 February 2020. 

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