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Unknown unknowns

Global Equities

We have developed this special note to highlight our short-term (tactical) and long-term (strategic) views in relation to the current market situation. Please read this note along with the Investment Monthly for March.

Special Coverage: To Buy or Not to Buy

Key Takeaways

  • We expect volatility to persist and remain “tactically neutral” on equities.
  • Emerging Markets and Asian equities are long-term opportunities, but investors should be prepared for short-term market challenges.
  • •   High-yield bonds - Asia, in particular - have become more attractive but liquidity issues and potential corporate defaults make us cautious. We are Neutral for now but Overweight for the long-term.

To buy or not to buy? That is the question bolder investors are starting to ask. And who could blame them? After all, most asset classes are now priced more cheaply than at the start of the year. Global equities are down more than 20% (Chart 1) while the riskier types of fixed income investment have also sold off significantly.

But is now really the time to go bargain-hunting, or is it premature to do so?

The coronavirus outbreak is still a humanitarian tragedy of global proportions. The US has now joined Europe in confronting the full force of the outbreak, while the situation in parts of Asia seems to have improved somewhat in recent weeks.

To control the spread of the virus, populations in many countries are staying home and only venturing out for necessities like food and medical care. 

Countless businesses have been forced to shut due to government enforcement or non-existent demand. This has impacted economic growth to the point where everyone now assumes we are in the midst of a global recession. The chart below shows how manufacturing activity – a key indicator of the health of the economy – around the world has already plummeted.

There is speculation as to whether we will experience a “V-Shaped” recovery this year, where the economy bounces back with vigour once the worst is over. The answer no doubt depends on the length and severity of the crisis. The longer, deeper and more persistent the outbreak, the more likely we are to see permanent damage to the economy. On the flip- side, if the virus is successfully contained in the next few months and government measures succeed in supporting businesses and consumers through the worst, it’s entirely possible that things may look much better by year-end.

Admittedly, this prognosis contains a lot of “ifs” and “buts”. But the reality is that no-one can yet predict the outcome with any degree of certainty.

So instead, let’s take a look at what we do know:

Firstly, we know that attempting to time the market is notoriously difficult, and we don’t recommend it. Trying to “predict the bottom” during volatile times is also dangerous, because you run the risk of missing out on any significant rebounds that happen in the interim.

Secondly, we know that the price of most asset classes has fallen significantly since the start of the year. Most equity markets have fallen by about 20% and are cheaper than their long-term averages, as illustrated in Chart 3. The valuations of riskier bond classes are also cheaper, with high yield bonds and Emerging Market debt (US Dollar-denominated) now offering double-digit yields over US Treasuries. 

Thirdly, we know that over the long-term, a well- diversified investment approach that favours attractively valued assets over less attractive ones, has plenty to recommend it. In particular, it allows investors to benefit from asset price growth over an extended period, while using effective diversification to weather any storms.  

So what does this mean for our investment strategy?

It’s important to emphasise that for the reasons discussed above, we intend to err firmly on the side of caution in the coming months. Corporate earnings are likely to be weak, with a consequent effect on the stock market. Strong portfolio diversification will therefore be especially important.

However, while it may not suit the more cautious investor, we’d be remiss not to acknowledge that attractive pockets of opportunity do exist right now in the market. 

We’ve already mentioned the attractiveness of equities. Within this asset class, Asian equities are our pick of the bunch. The continent’s structural growth trend is still in play, and in the near term Asian countries, compared to many developed western markets, more arguably have ammunition to support their economies during tough times – in particular through monetary and fiscal policy.

On top of this, we are already starting to see signs that life in some Asian counties – China, for example – is starting to return to normal. If this continues it will be a huge boon for their economies.

In the case of fixed income, high yield bonds are an asset class that is starting to look attractive, as current valuations suggest investors are now getting compensated for the inherent risks. The chart below shows how currently these bonds may even provide double-digit yields over US Treasuries.

But here’s the caveat. In volatile times, liquidity for these instruments can be challenging, meaning that the price advertised for high yield bonds isn’t necessarily the price you can transact at. This lack of liquidity can have a detrimental impact on portfolio performance, which is why we’re staying cautiously neutral over the next three months.

Nonetheless, the time is no doubt fast approaching when investors should consider going overweight high yield bonds – i.e. when things start returning to normal and liquidity returns. Our preference, as ever, is to seek out higher-quality spectrum, while staying clear of lower-quality companies which may struggle to survive in the current environment. As with equities, our preference right now is for Asian high yield bonds.

In summary then, it’s well worth considering the longer- term opportunities out there. Having an investment plan, and drip-feeding some, but not all of your money into some of these assets may prove fruitful in the long run, providing it’s done in a systematic, diversified manner.

But it’s also worth repeating that, with renewed volatility expected in the short term, this approach is probably not for the faint of heart. For those who prefer a sound night’s sleep, a more defensive approach to navigating the coming volatility may be more appropriate. 

For more information about our house view, please refer to the Investment Monthly below:


Macro Outlook

  • Governments are imposing ever-more restrictive measures to suppress COVID-19, which is imposing a heavy toll on economic activity
  • Unemployment is increasing at an unprecedented pace 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

Key Views

  • Market volatility has surpassed levels reached during the 2008 financial crisis. Global equities have entered bear market territory at the fastest pace ever. Corporates are under pressure from a global slowdown and lower oil prices
  • Although aggressive policy action has provided some support to risk appetite, investors are focused on the spread and speed of COVID-19. Evidence that case growth is “under control” seems to be needed for a sustainable recovery
  • This is a very tricky scenario for investors. Volatility is extremely high and there are many “unknown unknowns”. This type of environment suggest a cautious investment strategy in the short-term
  • However, we see a silver lining. Recent market moves have incorporated a lot of bad news which have materially increased prospective returns for risky asset classes, especially compared to government bonds. Our longer-term strategic view remains pro-risk. There is an attractive reward for investors that can take a long-term view and withstand short-term volatility

Key Risks

Central Banks

  • Central banks and finance ministries across the globe have eased policy at an unprecedented pace, including measures not seen before
  • The US Federal Reserve, European Central Bank and Bank of England have all significantly boosted asset purchase programmes and introduced huge liquidity provision measures
  • Fiscal policy has been loosened in previously-unseen ways in many developed economies (for example, guaranteeing workers incomes). The recently approved US stimulus package is the largest in the country's history
  • Emerging market central banks have also cut interest rates rapidly
  • However, macro policy cannot stop the precipitous near-term fall in output, which is a supply shock. The aim is to prevent significant second round effects on demand and a persistent reduction in supply capacity


Source: HSBC Global Asset Management, Global Investment Strategy, April 2020. 

The views expressed are those of HSBC Global Asset Management, they were held at the time of preparation, and are subject to change.

Investment Views

The worldwide spread of COVID-19 has created unprecedented volatility in financial markets. While the economic environment remains very difficult and way forward unusually uncertain, current market pricing creates opportunities for long-term investors

  • Global equities – On a strategic, longer-term basis we remain overweight. The recent sell-off has increased future return potential, creating opportunities for long-term investors. Over the shorter term, however, we adopt a more cautious stance given high volatility and uncertainty over the economic outlook.
  • Government bonds – Prospective returns look very low and the market is already pricing in a very pessimistic growth scenario. We remain underweight.
  • Corporate bonds – Corporate fundamentals are coming under pressure. We remain strategically underweight IG bonds. Within high-yield, recent spread movements have increased the credit risk premium to a level that supports a change to overweight.
  • The COVID-19 situation continues to evolve at rapid pace and we continue to monitor it very closely. We will communicate any further view changes through our usual macro and investment strategy communications suite.

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

Asset Class Performance at a glance

Global equities sold off in March, reflecting a sharp deterioration in the global economic outlook as COVID-19 containment measures were ramped up

  • Government bonds – Large monthly gains came amid increased demand for perceived ‘safe havens’ and significant policy easing by global central banks
  • Commodities – Oil prices slumped as a breakdown in relations between Russia and Saudi Arabia triggered a price war, while investors priced in an unprecedented decline in oil demand amid a worsening global economic outlook 

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 31 March 2020 in USD, total return, month-to-date terms

Base case views and implications


Monthly macroeconomic update

  • COVID-19 containment measures will likely lead to Q2 seeing a sharp decline in GDP across developed economies, including the US
  • Preliminary data suggests US unemployment is already rising rapidly

Base case view and implications

  • Strategically, we retain our overweight view on US equities. Valuations have significantly improved and US policy easing has been aggressive. However, given the level of uncertainty and fast case growth in the US, we are more cautious on a tactical basis
  • We remain underweight US government bonds


Monthly macroeconomic update

  • COVID-19 is expected to hit the economy via containment measures which are relatively strict compared to other regions. The eurozone’s already weak, export-dependent and globally-integrated manufacturing sector is particularly vulnerable
  • Sharp quarterly declines in Q2 GDP are likely for the Eurozone and the UK

Base case view and implications

  • We believe a more neutral stance on European equities is warranted in the short-term given economic challenges and political hurdles to more aggressive policy support. However, improved valuations are supportive of maintaining an overweight strategic view


Monthly macroeconomic update

  • China: With the easing of government restrictions, the Chinese economy is showing signs of gradual recovery in activity levels. The risk of the virus re-emerging needs to be monitored closely
  • India: On 24 March, the government announced a lockdown until mid-April. A significant hit to GDP growth and global supply chains can be expected
  • Japan: Economic data had already weakened significantly in Q4 2019 following a VAT tax hike and disruption caused by bad weather. COVID-19 is another major headwind for Japan’s export-dependent and globally integrated economy

Base case view and implications

  • China: Loosening of quarantine restrictions may help the economy get back on track. We continue to prefer Asian EM to other equity markets and retain our overweight view
  • India: The long-term structural growth potential remains positive, supporting our overweight view
  • Japan: Equity valuations are consistent with our overweight strategic view, but downside risks to growth and relatively constrained policy space warrants a more neutral tactical view

Other EM

Monthly macroeconomic update

  • Brazil: COVID-19 and declining commodity prices will be a near to medium term headwind for economic activity
  • Russia: Pre-existing sluggish growth and subdued domestic demand are now challenged further by the sharp decline in oil prices and COVID-19 disruption
  • MENA: The region’s economic growth prospects are not only constrained by the impact of COVID-19, but also by the substantial fall in the oil price in 2020 so far and by ongoing geopolitical risks

Base case view and implications

  • The impact of the COVID-19 outbreak will lead to a further deterioration in EM economic activity and corporate earnings
  • However, emerging market equities could outperform on the back of Chinese stimulus, and there remains significant policy space to help stabilise economic conditions
  • We remain overweight EM local currency assets (EM equities and EMD in local currency), on a strategic and tactical basis

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.

Asset class positioning


Government Bonds

Investment grade corporate Bonds

High-yield corporate Bonds


Asian Assets

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

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.

March 2020

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 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.
  • 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 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

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