Top of main content

Switching to recovery mode

03/07/2020
Commodities
FX
Bonds
Global Equities

Summary

Macro Outlook

  • Economic activity is now starting to pick up across a range of economies as lockdowns are lifted. However, the pace of recovery remains uncertain, especially beyond Q3
  • Our most likely scenario is a “swoosh” type recovery for the global economy; a sharp rebound in the near-term followed by a more gradual recovery.
  • Following the initial shock, we are already witnessing the emergence of cyclical winners (China, industrialised Asia) and relative losers (emerging markets ex Asia, smaller oil exporters, frontier economies, and the UK)
  • The global economy needs ongoing support, with little risk of inflation in the near term. The biggest downside risk to this “swoosh” scenario is a policy mistake. “Stimulus fatigue” could set-in over the second half of 2020

Key Views

  • The fastest bear market of all time has given way to the fastest recovery, driven by a reduction in downside tail risks and laggards catching-up
  • Global equities seems to discount a “swoosh” style recovery scenario, which is in line with economist and market projections. Right now, we don’t have a big quarrel with market pricing
  • The key question for investors is what to do from here. Expected returns for risky assets remain attractive, but have worsened since March. Meanwhile, the macro and corporate outlook remains tricky and is tilted to the downside
  • Risks are now balanced. After the moves in markets of the last couple of months, a period of range-bound trading is likely – like in 2010 after the global financial crisis
  • This means we want to continue to hold risky asset classes., especially the ones that offer attractive income flows such as Asia high-yield and selective equity markets

Key Risks

Central Banks

  • Balance sheets at most major central banks have expanded rapidly since March to maintain the flow of credit to the corporate sector and accommodate government pledges to ease fiscal policy
  • Policy makers have continued to support economies in recent weeks. The US Federal Reserve (Fed) is now purchasing corporate debt of individual issuers, rather than just exchange traded funds (ETFs)
  • The European Central Bank (ECB) boosted its emergency purchase programme by EUR600bn while the Bank of England (BoE) has committed to a further GBP100bn of asset purchases
  • China is ramping-up fiscal support. Bond issuance by the central/local governments has recently surged
  • But amid sharply rising public debt levels, there is a risk of “stimulus fatigue” which could constrain the economic recovery from COVID-19

 

Source: HSBC Global Asset Management, Global Investment Strategy, July 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

Global equities seems to discount a “swoosh” style recovery scenario and we think risks are balanced. We continue to hold an overweight view on attractively valued asset classes such as global equities and corporate bonds

  • Global equities – On a strategic, longer-term basis we remain “overweight” amid recently improved valuations. However, we are less positive on eurozone, Japan, and EM ex Asia equities amid policy challenges and structural headwinds
  • Government bonds – Prospective returns look very low and there is uncertainty as to whether bonds can retain their diversification properties as policy support increasingly relies on targeted fiscal easing measures. We remain “underweight”
  • Corporate bonds – We are seeing an acceleration in corporate downgrades and defaults, although a recent widening of spreads and central bank support means we have a more constructive stance relative to the beginning of 2020

Source: HSBC Global Asset Management, as at July 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 edged higher in June as economies continued to unwind COVID-19 containment measures and amid better-than-expected US economic data releases

  • Government bonds – Core bonds were little changed over the month; in Europe, peripheral spreads narrowed further as the ECB expanded its asset purchase programme
  • Commodities – Crude oil prices rose on a more positive demand outlook as OPEC+ producers reiterated their commitment to supply cuts

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 30 June 2020 in USD, total return, month-to-date terms

Base case views and implications

US

Monthly macroeconomic update

  • While consumption and employment have collapsed as a result of lockdowns, consumer confidence has remained above levels during the 2008-09 global financial crisis
  • The Fed has managed to engineer continued loose financial conditions and avoided large negative wealth effects for households
  • This supports the view that as the lockdown is eased, spending can initially recover at a reasonable pace. However, virus case growth dynamics are relatively unfavourable

Base case view and implications

  • We hold an overweight view on US equities. Valuations have improved and US policy easing has been aggressive. The US also benefits from medical/technological resources to fight the outbreak
  • We remain underweight US government bonds, although we recognise that Treasury valuations are attractive versus other government bond markets

Europe

Monthly macroeconomic update

  • Eurozone countries have re-opened their economies, and case growth remains broadly under control in contrast with the US
  • The UK's economic policy response to the crisis has been timely and robust, although problems with developing adequate test-and-trace infrastructure increases the risks of a second wave of infections. A disruptive hard Brexit at the end of 2020 is also possible

Base case view and implications

  • We believe a neutral strategic stance on European equities is warranted given political challenges to coordinated policy support, although there has been some progress in recent weeks
  • UK equities, in our view, benefit from highly attractive valuations and a robust economic policy response to the crisis. We remain overweight

Asia

Monthly macroeconomic update

  • China: China has seen a notable recovery from supply-side disruptions with improvements in the industrial, construction, real estate, tech and auto sectors, but the services sector is lagging and recent outbreaks need to be monitored closely
  • India: COVID-19 has hit India’s economy hard, with case growth remaining on an upward trend amid constraints to mass testing and densely populated cities
  • Japan: Japan along with other industrialised Asian economies have relaxed containment measures amid lower infection rates and appear better prepared for exit given their testing and contact tracing capacity

Base case view and implications

  • China: A rapid rebound in economic activity supports our overweight view on China equities. We continue to prefer Asian EM to other EM equity markets and retain our overweight view
  • India: We believe a cautious tactical view on Indian equities is warranted given significant economic headwinds posed by the virus
  • Japan: Relatively constrained policy space warrants a neutral strategic view on Japanese equities 

Other EM

Monthly macroeconomic update

  • Brazil: The country’s healthcare system has been overwhelmed by COVID-19 amid a relatively lax programme of containment measures. The economy is also facing headwinds from rising political uncertainty and low commodity prices
  • Russia: Pre-existing sluggish growth and subdued domestic demand are now challenged further by lower 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 low oil prices and ongoing geopolitical risks

Base case view and implications

  • We think it makes sense to be selective on EM assets
  • Many EM economies (especially outside of Asia) have limited capacity to manage the current health and economic crises, and are exposed to low commodity prices and investor outflows
  • Meanwhile, relative valuations versus DMs have narrowed
  • The bright spot is EM Asia where a growth recovery in China can be a tailwind

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

Asset class positioning

Equities

Government Bonds

Investment grade corporate Bonds

High-yield corporate Bonds

Alternatives

Asian Assets

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.

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

June 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 30 June 2020.

Past performance is not an indication of future returns.

  • Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout June 2020, HSBC Global Asset Management’s long-term expected return forecasts which were generated as at 31 May 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 May 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  30 June 2020.

This document has been issued by HSBC Bank (Taiwan) Limited (“the Bank”) in the conduct of its regulated business in Taiwan and may be distributed in other jurisdictions where its distribution is lawful.  The content is for your reference only.  The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document must not be distributed to any other jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings.

 

This document has no contractual value and is not and should not be construed as an offer or the solicitation of an offer or a recommendation for the purchase or sale of any investment in any jurisdiction in which such an offer is not lawful or subscribe for, or to participate in, any services. The Bank is not recommending or soliciting any action based on it.

 

The information stated and/or opinion(s) expressed in this document are provided by HSBC Global Asset Management Limited.  We do not undertake any obligation to issue any further publications to you or update the contents of this document and such contents are subject to changes at any time without notice.  They are expressed solely as general market information and/or commentary for general information purposes only and do not constitute investment advice or recommendation to buy or sell investments or guarantee of returns.  The Bank has not been involved in the preparation of such information and opinion.  The Bank makes no guarantee, representation or warranty and accepts no responsibility for the accuracy and/or completeness of the information and/or opinions contained in this document, including any third party information obtained from sources it believes to be reliable but which has not been independently verified.  In no event will the Bank or HSBC Group be liable for any damages, losses or liabilities including without limitation, direct or indirect, special, incidental, consequential damages, losses or liabilities, in connection with your use of this document or your reliance on or use or inability to use the information contained in this document.

In case you have individual portfolios managed by HSBC Global Asset Management Limited, the views expressed in this document may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management Limited primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity.

 

The Bank and HSBC Group and/or their officers, directors and employees may have positions in any securities or financial instruments mentioned in this document (or in any related investments) (if any) and may from time to time add to or dispose of any such securities or financial instruments or investments.  The Bank and its affiliates may act as market maker or have assumed an underwriting commitment in the securities or financial instruments discussed in this document (or in related investments) (if any), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

 

The information contained within this document has not been reviewed in the light of your personal circumstances. Please note that this information is neither intended to aid in decision making for legal, financial or other consulting questions, nor should it be the basis of any investment or other decisions. You should carefully consider whether any investment views and investment products are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. The investment decision is yours but you should not invest in any product unless the intermediary who sells it to you has explained to you that the product is suitable for you having regard to your financial situation, investment experience and investment objectives.  The relevant product offering documents should be read for further details.

 

Some of the statements contained in this document 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. Such statements do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We can give no assurance that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. We do not undertake any obligation to update the forward-looking statements contained herein, whether as a result of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

Investment involves risk.  It is important to note that the capital value of investments and the income from them may go down as well as up and may become valueless and investors may not get back the amount originally invested. Past performance contained in this document 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. Past performance information may be out of date. For up-to-date information, please contact your Relationship Manager.

 

Investment in any market may be extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect influences. Such characteristics can lead to considerable losses being incurred by those exposed to such markets. If an investment is withdrawn or terminated early, it may not return the full amount invested. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in certain jurisdictions. Narrowly focused investments and smaller companies typically exhibit higher volatility. There is no guarantee of positive trading performance. 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. Mutual fund investments are subject to market risks. You should read all scheme related documents carefully. The relevant investment risks of mutual fund investments are disclosed in fund prospectuses for your perusal. The past performance of fund manager should not be construed as the guarantee of any fund’s minimum return or similar performance in the future. Prospective investors shall seek independent opinions on individual investment programs for their particular interests and needs or on relevant factors. Investors shall make their own judgment in investments, and shall assume full responsibility on any gain/loss, or any direct or indirect loss deriving from the information provided.

 

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 guaranty on the management or operation performance of the trust business.