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Moving towards a vaccine

03/12/2020
Commodities
FX
Bonds
Global Equities

Summary

Macro Outlook

  • After the initial surge, growth is now set to moderate as economies enter the next phase of the recovery: the “flatter part of the swoosh
  • There are relative winners (China, industrialised Asia) and relative losers. Europe faces a double-dip recession on the back of more stringent measures to control a pronounced second wave of Covid
  • Recent events have reduced key uncertainties around US politics and chances of an effective vaccine. We are reaching the end of the age of uncertainty
  • The global economy needs ongoing policy support. There is little risk of inflation in the near term

House View

  • Pricing out of key uncertainties and signs of bottoming profits are supporting market sentiment. Odds of a reflationary scenario have increased
  • However, recent strong market gains means that expected returns are lower for longer
  • We think equity markets that have been the laggards this year can perform well in a recovery narrative. We are upgrading EM ex Asia and UK equities and maintaining an overweight view on eurozone equities
  • Evidence is building that bonds are losing their hedging properties and other potential diversifiers have also disappointed recently. We think investors should expand the opportunity set to find new diversifiers

Key Risks

Policy outlook

  • Global central banks have rapidly expanded balance sheets since March to maintain the flow of credit & accommodate fiscal easing. The Fed has moved to average inflation targeting which implies “lower for even longer” rates.
  • The European Central Bank (ECB) has indicated it expects to increase policy support at its December monetary policy meeting given the hit to growth from the Covid second wave. The Bank of England (BoE) boosted its QE programme by GBP150bn in November
  • The broadening recovery in China and financial stability concerns mean that the People’s Bank Of China (PBOC) remains focused on targeted micro measures and fine-tuning
  • Globally, debt/GDP ratios have moved out 20-30% points post-Covid. There is a significant risk of a fiscal policy error if stimulus is withdrawn too early

 

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

House view

We are now more positive on equity markets exposed to the economic cycle that have lagged in their performance this year, including those in Europe and emerging markets outside of Asia. Expected returns have fallen throughout 2020 and we need to be realistic. Overall, we want to take risk where it is being best rewarded

  • Equities – A reduction of political uncertainty and signs of a bottoming out of profits are supporting market sentiment. Odds of a reflationary scenario have increased, although strong gains already this year could limit upside potential
  • Government bonds – Evidence is building that bonds are losing their hedging properties. Poor prospective returns and low yields cement the case for diversifying portfolios into a wider set of alternative asset classes
  • Corporate bonds – Spreads have come down materially over the last few months. We are less positive on investment grade bonds, particularly longer-duration bonds where expected returns are lower

Source: HSBC Global Asset Management, as at December 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 November on the back of positive vaccine news, boosting the global economic outlook

  • Government bonds – US Treasuries edged higher over the month (yields fell) as the prospect of a split Congress diminished expectations of major US fiscal stimulus; European peripheral bonds rallied amid upbeat risk appetite and as investors anticipated further ECB stimulus measures
  • Commodities – Oil prices rallied on vaccine optimism, and expectations of improving demand conditions in 2021

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

Base case views and implications

US

Monthly macroeconomic update

  • Data on personal spending, capital goods shipments and home sales has been strong
  • Nevertheless, signs of weakness have emerged in personal income and initial jobless claims data amid still high Covid case growth
  • This puts pressure on Congress to deliver another fiscal support package, although progress is unlikely before year-end

Base case view and implications

  • US equities remain attractive given their exposure to tech and quality stocks. Cyclical parts of the market (smaller to medium-sized companies and in the financial, industrial and materials sectors) could benefit from a strong vaccine-led recovery in 2021
  • Prospective returns for US Treasuries look low but remain attractive versus other government bond markets. Meanwhile, a “lower-for-even-longer” rate regime limits the risk of higher yields

Europe

Monthly macroeconomic update

  • A wave of recent national lockdowns across Europe is likely to result in a double-dip recession in Q4. The UK faces additional headwinds from Brexit
  • Despite near-term economic headwinds, Europe is well placed to benefit from its access to vaccines in 2021. Activity should rebound strongly over the year

Base case view and implications

  • Despite near-term economic challenges, we believe an overweight stance on European equities remains justified due to regional indices exposure to cyclical sectors that can perform well in 2021
  • European government bond valuations are very unattractive and we think their diversification properties are limited

Asia

Monthly macroeconomic update

  • China is expected to remain a cyclical outperformer, with the services sector taking the reins in terms of growth. The potential for more stable US-China relations is also a positive for the outlook
  • India’s economic activity appears to be gradually returning to pre-Covid levels, as reflected in various high-frequency indicators, but service sector activity continues to lag
  • Japan is well positioned for a strong recovery in 2021 given its favourable access to vaccines and scope for a rebound in global trade amid easing trade tensions

Base case view and implications

  • A rapid rebound in economic activity supports our overweight view on China equities. We continue to prefer Asian EM equities to other EM markets and retain our overweight view
  • Despite macro challenges, our overweight stance on Indian equities is still warranted amid a decent economic recovery, a record monsoon, and tailwinds from landmark reforms
  • Japanese equities are attractively valued but we think there are challenges in unlocking this value potential. We remain neutral

Other EM

Monthly macroeconomic update

  • Brazil’s economy staged an impressive rebound in Q3, but more recently  the pace of recovery has slowed as the government winds down fiscal support measures
  • Russian activity data for October suggest that the recovery stalled at the start of Q4. The economy is likely to struggle in the coming months amid tightening virus restrictions
  • Recovery prospects in MENA are constrained by low oil prices, weak tourism flows, and limited government fiscal support (Saudi Arabia has already introduced some austerity measures). Geopolitical risks also remain  

Base case view and implications

  • We still think it makes sense to be selective on EM assets
  • We believe investors should look for “EM fortresses” that can be resilient to multiple headwinds. For us, the bright spot remains North Asia which benefits from exposure to mainland China
  • Nevertheless, we think there is scope for markets in EM ex Asia that could perform well in the coming months given their recent underperformance, attractive valuations, and a rebound in global growth in 2021 as vaccines are rolled out. We upgrade to neutral

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

Asset class positioning

Equities

Government Bonds

Corporate Bonds

Alternatives

Asian assets

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

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

November 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 November 2020

Past performance is not an indication of future returns

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

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