Macro Outlook
- We are in the restoration phase of the economic cycle. Activity remains below pre-Covid levels, everywhere except China
- The pace of recovery will depend on where we are in the world, on the delivery of the vaccine, and on continued policy support. In some laggard economies, there is scope for cyclical catch-up in 2021
- High unemployment rates, stressed corporate balance sheets, and fragile confidence means that the global economy needs ongoing policy support
- Near-term volatility aside, inflation is likely to remain modest over the medium term, but upside risks have increased in the US
House View
- We continue to run a pro-risk allocation and see higher upside risks as policy error becomes less likely in the short run
- But as investors we need to be vigilantly bullish. Our measures of expected returns are lower than last year. Not much needs to happen to disappoint markets
- Within our risk allocation, we think shorting the recovery narrative continues to be costly. Equity laggards from last year have further room to go. Meanwhile, EM fixed income looks attractive
- Higher bond yields is a key risk to monitor. 10yr US Treasury yields of 1.5% and higher can challenge current equity valuations
Key Risks
Policy outlook
- Recent events have reduced key policy uncertainties. In our view, the age of policy uncertainty has ended
- Global central banks continue to rapidly expand balance sheets. Major central banks have now adopted lower-for-even longer interest rates
- Compared to the West, monetary policy in China is set to become relatively hawkish. The People’s Bank Of China (PBOC) will focus on liquidity and targeted measures. Across Asia, incremental stimulus will be limited
- US-China tensions inevitably persist, but the Regional Comprehensive Economic Partnership (RCEP) trade agreement sets a new tone and will have a meaningful economic impact
Source: HSBC Global Asset Management, Global Investment Strategy, February 2021. The views expressed are those of HSBC Global Asset Management, they were held at the time of preparation, and are subject to change.
We continue to run a pro-risk allocation and see higher upside risks as policy error becomes less likely in the short run. But we need to be vigilantly bullish. Valuations have become less attractive, virus trends remain uncertain, while higher bond yields is a key risk to monitor
- Equities – For us 2021 is set to be a year of global recovery and falling political uncertainty. Combined with still attractive relative valuations, and ongoing policy support, allocating to equities continues to makes sense
- Government bonds – Evidence is building that bonds are losing their hedging properties. For now we maintain an underweight view, although US Treasury valuations are becoming more attractive on a relative basis
- Corporate bonds – Spreads have come down materially over the last few months. Nevertheless, Asian bonds continue to look attractive relative to other global opportunities
Source: HSBC Global Asset Management, as at February 2021, 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.
Global equities edged slightly lower in January amid Covid-19 concerns, including the spread of new variants and the slow pace of vaccination in some countries
- Government bonds – Longer-dated US Treasuries fell over the month (yields rose) as the US Democrats won two Senate seats in Georgia, boosting President Biden’s chances of implementing his ambitious fiscal stimulus proposals
- Commodities – Oil prices edged higher as Saudi Arabia pledged a voluntary output cut; gold prices fell amid a slight recovery in the US dollar
Past performance is not an indication of future performance
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 January 2021 in USD, total return, month-to-date terms
US
Monthly macroeconomic update
- Vaccine rollout and further fiscal stimulus is a major positive for the 2021 outlook
- Nevertheless, near-term downside risks remain considerable amid challenging virus dynamics and ongoing economic restriction measures
- Inflation is set to pick up markedly in the coming months, mainly due to base effects. However, this is unlikely to translate into sustained inflationary pressure
Base case view and implications
- We remain constructive on US equities. Significant tech and quality exposure remains a positive, while cyclical parts of the market can potentially benefit from fresh fiscal stimulus
- Prospective returns for US Treasuries have recently improved and remain attractive versus other government bond markets. A dovish Fed limits the risk of higher yields
Europe
Monthly macroeconomic update
- The near-term outlook remains challenging amid a resurgence of the virus and renewed lockdowns. The pace of vaccine rollout in the EU has been relatively disappointing
- 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
- A strong cyclical recovery later in 2021 combined with a dovish ECB and relatively generous government income support schemes back our overweight view on eurozone equities
- European government bond valuations look 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. Nevertheless, the recovery could slow later in 2021 as policy stimulus fades and the global recovery shifts to domestically focussed services sectors
- India’s economic activity appears to be gradually returning to pre-Covid levels, although a fragile banking sector and relatively weak fiscal policy support are headwinds
- Japan is well positioned for a strong recovery in 2021 given the country's favourable access to vaccines, although the pace of rollout has so far been relatively slow
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 and the country’s status as a key manufacturing hub for vaccines
- 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 was Latin America’s economic outperformer last year, although headwinds this year are considerable amid vaccination challenges and a withdrawal of fiscal support
- Russia’s economy is less exposed to social distancing measures versus other emerging markets, and benefits from the recent uptick in oil prices
- Gulf economies should experience a strong recovery this year amid rapid Covid-19 vaccination, combined with higher oil prices and production. However, other parts of MENA are likely to lag amid fiscal constraints and a lack of vaccine access
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 to perform well given their recent underperformance, attractive valuations, USD weakness, and a rebound in global growth in 2021
Source: HSBC Global Asset Management. As at 1 February 2021. The views expressed were held at the time of preparation, and are subject to change