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Balanced risks for markets

03/09/2020
Commodities
FX
Bonds
Global Equities

Summary

Macro Outlook

  • With lockdowns having mostly been lifted, economic activity has picked up sharply across a range of economies, albeit from historically depressed levels. However, the pace of recovery remains uncertain, especially beyond Q3
  • Our most likely scenario is a “swoosh” type recovery for the global economy; after a sharp rebound, economic activity is likely to recover more gradually. Developed markets are unlikely to reach pre-crisis levels of activity until 2022
  • Following the initial shock, we are already witnessing the emergence of relative winners (China, industrialised Asia) and losers (emerging markets ex Asia, smaller oil exporters, frontier economies, and the UK)
  • The global economy needs ongoing support and positive virus developments. The biggest downside risks to our “swoosh” scenario are fiscal policy mistakes or renewed lockdowns across economies

Key Views

  • We think pricing in many markets is consistent with our baseline expectation of a “swoosh” style economic recovery with some tentative signs of the more optimistic rapid recovery scenario being discounted. Overall, we do not have a big quarrel with market pricing at this point
  • There are upside risks to markets, linked to better news and price momentum. Meanwhile, downside risks include the re-emergence of the virus, policy error, or long-term damage to economies. We view these risks as roughly balanced which means markets could be range-bound in the coming months
  • Risk-taking can be rewarded by the market, but after the fastest rally on record, the hurdle for positive surprise is higher than it was, and prospective returns have fallen considerably 
  • A handful of asset classes – Asia high-yield, local-currency emerging market debt, fallen angels and selected equities – still offer relatively-high expected returns. For us, now is also the time to think hard about diversifying portfolios out of core government bonds into a wider set of alternative asset classes

Key Risks

Central Banks

  • While the pace of balance sheet expansion at most central banks has slowed recently, monetary policy is expected to remain highly supportive of economies
  • In particular, to boost activity following the Covid-19 shock, ultra-loose monetary policy continues to support fiscal stimulus efforts by governments
  • The US Federal Reserve (Fed) is likely to commit to a near-zero interest rate policy and tolerate above-target inflation until demand makes a full recovery
  • The European Central Bank (ECB) has affirmed to use the full EUR1.35tn envelope for asset purchases, helping borrowing costs for sovereign borrowers in the eurozone to stay low and stable
  • The People’s Bank of China (PBoC) has paused its easing cycle amid a rebound in activity in Q2 but has left space to support government bond issuance or if conditions deteriorate

 

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

We think current market pricing remains broadly consistent with a “swoosh” economic recovery. We still favour risky asset classes such as selected global equities, and bonds issued by Asian corporates and emerging market governments (in local currency)

  • Global equities – Although prospective returns have recently fallen, we think valuations remain relatively attractive with pricing in most markets consistent with our baseline “swoosh” recovery scenario. Risks are balanced in our view
  • Government bonds – There is uncertainty as to whether bonds can retain their diversification properties as policy support increasingly relies on targeted fiscal easing measures. We also estimate poor valuations and thus remain “underweight”
  • Corporate bonds – Central bank action remains a crucial support for this asset class. Asian bonds are particularly attractive to us, alongside high-yield bonds (especially “fallen angels” that were previously investment grade)

Source: HSBC Global Asset Management, as at September 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 rallied in August as global central banks and governments continued to provide policy support amid an ongoing economic recovery

  • Government bonds – Longer-dated core bonds fell amid improving global economic data, signs of declining US Cvoid-19 case growth, heavy issuance, and as the Fed confirmed it would allow inflation to overshoot its 2% target
  • Commodities – Oil prices rose on the back of declining US crude inventories and as Hurricane Laura disrupted US production, gold prices held steady

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 August 2020 in USD, total return, month-to-date terms

Base case views and implications

US

Monthly macroeconomic update

  • Many sectors of the US economy have recovered quickly, including spending on goods, housing, and durable goods orders (particularly for autos)
  • However, spending on services continues to lag amid ongoing social distancing measures, while the labour market recovery remains more tentative
  • Downside risks to the outlook remain elevated Covid-19 case growth, and a further delay in extending the top-up to unemployment insurance. Consumer confidence has taken a hit from the delay in enacting another round of fiscal stimulus

Base case view and implications

  • We still hold an overweight view on US equities. However, a more cautious stance is warranted in the short-term amid domestic political uncertainty and unfavourable Covid-19 case dynamics
  • We remain underweight US Treasuries, although we recognise that valuations are attractive versus other government bond markets and Federal Reserve action limits the risk of higher yields

Europe

Monthly macroeconomic update

  • High frequency indicators signal that the recovery in the eurozone is slowing following the initial bounce back and amid rising virus case numbers. Germany is outperforming.
  • The UK recovery is set to be very strong in Q3, but the end of the government’s job retention scheme in October and the risk of a no-deal Brexit are significant headwinds

Base case view and implications

  • We believe an overweight stance on eurozone equities remains justified amid supportive policy. However, pressure on dividends and rising virus case growth are downside risks
  • We now hold a negative view on UK equities in the short-term due to macro risks, dividend weakness, and poor momentum

Asia

Monthly macroeconomic update

  • China: China’s economy has rebounded rapidly as the country has successfully supressed the virus and provided significant policy support. However, a weak global economy is a headwind to the export sector, while household demand remains soft
  • India: India’s economy faces headwinds from an underwhelming government fiscal response and strained banking sector. Positively, however, the virus curve is flattening
  • Japan: Japan’s recovery benefits from a healthy banking and corporate sector, strong policy support and a broad suppression of the virus. External demand also remains weak

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: Japanese equities are attractively valued although low structural growth and constrained Bank of Japan (BoJ) policy space means we hold a neutral view

Other EM

Monthly macroeconomic update

  • Brazil: The country remains at the epicentre of the pandemic, although there is evidence that the situation is getting under control. The government has introduced household income support measures, although further action is constrained by poor fiscal dynamics
  • Russia: Weak domestic demand, low oil prices and limited fiscal policy support are headwinds to economic recovery, although a relatively small share of services is a plus
  • MENA: The region’s recovery prospects are constrained by low oil prices and weak tourism flows. Some countries such as Saudi Arabia are already introducing austerity measures. Geopolitical risks also remain 

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
  • For us, the bright spot is EM Asia where a growth recovery in China can be a tailwind

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

August 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 31 August 2020.

Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 31 August 2020.

Past performance is not an indication of future returns.

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

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