Top of main content

Geopolitical Tensions: Modestly reducing portfolio risk

01/03/2022
Commodities
FX
Bonds
Global Equities

Key Takeaways

  • Escalated geopolitical tensions have led to rising energy prices and higher inflation. To reduce risk, we downgrade global equities to Neutral and Eurozone equities to Underweight, upgrading investment-grade corporate bonds to Overweight. 
  • Economic and earnings fundamentals are still positive. However, we have rebalanced our equities exposure between cyclicals and defensive stocks. We have upgraded Consumer Staples in Europe and Healthcare in the US. 
  • We are still positive on the Energy and Financials sectors. Energy stocks benefit from high energy prices and Financials from higher rates.

Talking Points

1. Investment implications of Russia-Ukraine tensions

  • Escalated tensions are hitting risk appetite. One impact is on energy prices (Russia represents 11% of the world’s oil production and exports three quarters of its production either as crude oil or products), which have surged above USD100/ barrel. We downgrade global equities to Neutral and upgrade investment-grade bonds to Overweight to reduce portfolio risk.
  • Europe is impacted most on energy. The rise in prices will weigh on household consumption and inflation, and potentially rate tightening which warrant our downgrade on Eurozone stocks to Underweight. To add quality, we upgrade Europe Consumer Staples to Neutral and US Healthcare to Overweight.
  • Gold (reached a 13-month high) and Treasuries are benefitting from the conflict but we think this will be short-lived. We think economic and earnings fundamentals are still strong, so investors should not panic sell but stay diversified instead. 

Source: Bloomberg, HSBC Global Private Banking, as at 18 February 2022. Past performance is not a reliable indicator of future performance.

2.  Where do we see opportunities in equities?

  • The Q4 earnings season has been strong so far. We prefer quality stocks with strong market positions and business models as they are in a better position to pass on higher input costs to customers and are less disrupted by higher rates. Their P/E ratios also tend to rise when inflation rises compared to the rest of the market.
  • We are overweight Energy stocks to benefit from high energy prices and hedge against geo-political risks, and overweight Financials as they can benefit from higher rates. Asian banks are more attractively valued.
  • In Asia, we continue to favour ASEAN stocks due to continued growth and attractive valuations. We will monitor the policy direction from the National People’s Congress in March to evaluate our view on Chinese assets. 

Source: Bloomberg, HSBC Global Private Banking, as at 18 February 2022. Past performance is not a reliable indicator of future performance.

3.  What should bond investors watch out?

  • With a more hawkish tone among the developed market central banks amid rising inflation, we now forecast 1.5% in Fed rate hikes (0.25% in Mar), three 0.25% hikes by the BOE (Mar, May & Aug), and two 0.25% hikes (Oct & Mar) by the ECB.
  • The flattening of the yield curve has historically signalled increased recession risk but there could be false alarms. Past data shows that when the curve started to invert, there would be an average lag of 14 months before a recession began. We do not expect inversion to happen this year.
  • Following mild spread widening and more rate hikes priced in, short-dated high yield offers the best risk-reward profile. We also like emerging markets hard-currency corporate bonds due to more attractive spreads than DM bonds with the same rating, and US strength. 

Source: Refinitiv Datastream, as at 24 February 2022. Past performance is not a reliable indicator of future performance. 

House views

 

Our latest short-term (3-6 months) and long-term (>12 months) views on various asset classes

Global

Escalated geopolitical tensions, rising interest rates and high inflation continue to be short-term headwinds and warrant our downgrade to Neutral. Longer-term fundamentals still look solid.

overweight
Neutral
Short-term
overweight

Overweight

Long-term
United States

It remains our biggest equity overweight due to the size and quality character of US stocks. Valuations are relatively high which implies some caution.

overweight
Overweight
Short-term
overweight
Overweight
Long-term
United Kingdom

The asset class is attractively valued but rate & tax hikes and declining real incomes pose challenges. Longer term, UK indices are heavily exposed to the value factor which still have scope to perform well. 

Neutral
Neutral
Short-term
overweight

Overweight

Long-term
Eurozone

Europe equities are likely to be volatile due to its geographical and economic proximity to Russia-Ukraine tensions. Higher energy prices will keep inflation high and challenge businesses. We move to Underweight short-term.

Underweight
Underweight
Short-term
overweight

Overweight

Long-term
Japan

Autos and industrials are hit by supply chain issues but capital goods see good demand. This market benefits from relatively good earnings performance and a decent macro outlook as global capex spending increases.

 Neutral
Neutral
Short-term
Overweight
Overweight
Long-term
Emerging Markets (EM)

Policy headwinds are likely to weigh on performance (e.g. Fed tightening) while valuations are not particularly cheap. 

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Central & Eastern Europe and Latin America

The benefit of rising commodity prices may fade and further rate hikes are coming. Policy tightening is a key challenge, and geopolitics will weigh on returns in the near term.

Underweight
Underweight
Short-term
Neutral
Neutral
Long-term

Asian ex-Japan

It is our preferred EM region with fewer rate hikes than elsewhere and ASEAN growth accelerates.

overweight
Overweight
Short-term
Neutral
Neutral
Long-term
China

Regulatory overhang, the property downturn and “zero-Covid” strategy are near-term headwinds. The outlook is supported by macro policy easing and efforts to stabilise the housing market, undemanding valuations, etc.

Neutral
Neutral
Short-term
Overweight
Overweight
Long-term
India

The medium-term growth outlook remains intact amid positive reform prospects. However, elevated valuation and the prospect of tightening liquidity and higher rates are concerns. High oil prices pose macro and margin risks.

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Hong Kong

A ramp-up in social distancing measures to tackle the fifth wave of the Covid-19 are headwinds to its recovery. Longer-term, the market’s exposure to financials/value sectors could be beneficial as interest rates rise.

 Neutral
Neutral
Short-term
 Neutral
Overweight
Long-term
Singapore

The Singapore Budget for 2022 reflects the country’s focus on long-term spending. Tourism and aviated related activities are expected to bounce back as quarantine restrictions are lifted. The market benefits from global growth.

overweight
Overweight
Short-term
overweight

Overweight

Long-term
South Korea

EPS growth is likely to slow following 2021’s exceptional strength. Exposure to growth stocks implies vulnerability to higher global yields, despite undemanding valuations and Korea’s leading innovations in the digital economy.

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Taiwan

Structural demand in 5G and semiconductors is key driver. Taiwan equities have significant exposure to growth/tech sectors which are sensitive to US yields, though the high dividend yield is supportive. Geopolitical risks remain.

Overweight
Overweight
Short-term
Neutral
Neutral
Long-term

Developed markets (DM)

Although yields have backed up, they remain volatile and the asset class is unattractive.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
United States

Global growth expansion, central bank policy normalisation and inflation uncertainties pose downside risks although a big move higher in yields is unlikely. 

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
United Kingdom

Inflation pressures amid supply chain disruption support policy tightening. Risk-adjusted returns look poor.

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
Eurozone

We now expect the ECB to announce a considerably steeper taper of QE with net asset purchases ending completely in September.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
Japan

Japanese government bonds (JGBs) are overvalued and the bond risk premium remains negative. However, the “Yield Curve Control” framework should limit volatility and the risk of significantly higher yields in the near-term.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
Emerging Markets (local currency)

Select opportunities exist but some EM countries are hiking rates and USD remains strong.

Neutral
Neutral
Short-term
overweight

Overweight

Long-term
Emerging Markets (Hard currency)

Amid higher Treasury volatility, we still find yield but have become more selective.

neutral
Neutral
Short-term
Neutral
Neutral
Long-term

Global investment grade (IG)

Investment-grade bonds are key for portfolio diversification but rate volatility remains an issue. Despite this, we upgrade to Overweight taking into account recent volatility. 

Neutral
Overweight
Short-term
Underweight
Underweight
Long-term
USD investment grade (IG)

USD Investment grade is our pick to help weather expected short-term volatility in portfolios even if valuations are relatively unattractive. 

Neutral
Overweight
Short-term
Underweight
Underweight
Long-term
EUR and GBP investment grade (IG)

Spreads are at historically tight levels and it is important to monitor trends in corporate fundamentals. 

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
Asia investment grade (IG)

Asia investment grade offers quality names and issuers with strong implicit government support. 

overweight
Overweight
Short-term
overweight

Overweight

Long-term
Global high-yield (HY)

Spreads have widened and short-dated bonds have already priced in many rate hikes. 

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
US high-yield (HY)

Improving leverage levels in the US HY space should help cope well with higher interest rates, while the US economy is still expanding, resulting in an historically low default rate.

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
European high-yield ex UK (HY)

Valuations have improved on the ECB’s hawkish tone and geopolitical developments. Spreads may be affected by the risk-off sentiment in the short-term but the market will ultimately shift to the broader economic context.

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
Asia high-yield (HY)

Default rates remain low and spreads look relatively attractive. China’s economy and default rates need to be monitored in the context of tightening policy, deleveraging efforts and regulatory pressures.

overweight
Overweight
Short-term
overweight
Overweight
Long-term

Gold

Gold is benefitting from volatility but higher real yields and strong dollar are headwinds. Performance as a risk-off diversifier is unreliable. 

overweight
Neutral
Short-term
 Neutral
Underweight
Long-term
Oil

Demand should weaken in Q1 but inventories are low and OPEC’s spare capacity is low. 

 Neutral
Neutral
Short-term
overweight
Overweight
Long-term

Sector Views

 

Global and regional sector views based on a 3-6 month horizon

As governments consider COVID endemic and lift all restrictions, this should boost the travel and hospitality sectors. Rising wages are being offset by higher living costs, but pent-up demand and high savings should keep demand buoyant. Supply chain constraints have somewhat eased in some areas. We downgrade Europe given the present geopolitical uncertainties.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

Inflationary pressures are increasing rate-rise expectations helping to lift banking stocks. In Europe and Asia, low valuations, robust capital markets activity, rising insurance premiums, thriving mortgage market make the sector particularly attractive. In contrast US financials are trading at a significant premium to their peers after many quarters of strong results.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Overweight
Asia
Asia
Overweight

Slowing growth and rising input costs (commodities, labour and energy) weigh on margins, profits and sentiment, accelerating the trend for greater automation. Supply chain issues persist but are easing. Rebuilding historically low Inventories should provide some stability to earnings. Valuations have become more attractive but sentiment is likely to remain subdued.

Global
Global
Underweight
US
US
Neutral
Europe
Europe
Neutral
Asia
Asia
Underweight

The sector remains under pressure from the slowing economies in US and China, and lacks lustre growth in Europe. Valuations remain elevated but are no longer rich. Digitalisation, electrification and automation should drive long-term above average growth for the next decade. We focus on strong cash-generative businesses with strong market positions.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

The sector benefits from steady cash flows & growth from increased data usage as more activity shifted on-line and business digitalised. Media companies are likely to see continued robust demand.  The 5G roll-out is positive for telecom equipment provider but neutral/negative initially for service providers.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

Although slowing growth in China remains a concern, growth in DM, especially related to the extensive fiscal stimulus packages should be supportive of demand and prices. Valuations appear attractive. Post-super cycle, lowered investment in new capacity may limit supply in some metals in the medium-term, especially in commodities linked to the electrification of the economy. 

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Neutral
Asia
Asia
Neutral

Private residential real estate is seeing strong demand supported by high savings rate and lower interest rates. Commercial real estate is suffering from low demand as corporates look to reduce office space and retail moves online. 

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Neutral
Asia
Asia
Neutral

The sector contains many quality stocks with good dividend yields. We upgrade European consumer staples to Neutral given these attractive characteristics. However, valuations are somewhat elevated. So a selective approach is required focusing on those with strong brands and/or pricing power which can protect margins and earnings as inflationary pressures mount.

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Neutral
Asia
Asia
Neutral

Low inventories and supply-demand imbalances continue to drive prices higher. We expect energy prices to either stabilise at these elevated levels or push higher. Chronic under-investment is likely to support prices in the medium term despite the energy transition gaining momentum.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Overweight
Asia
Asia
Overweight

We are more positive on large pharmaceutical companies in the US with their strong cash flows, above-average dividend yields and attractive valuations. COVID related backlogs in elective surgical procedures should drive strong growth for 2022 for medical technology companies. Biotechnology sector provides more speculative investment opportunities with their innovative medicines. 

Global
Global
Neutral
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Neutral

Renewable stocks are attracting attention after stock prices and valuation pulled back significantly from overly optimistic levels. Caution is still required as companies may not be able to pass on rising energy prices which may impact margins negatively.

Global
Global
Underweight
US
US
Underweight
Europe
Europe
Neutral
Asia
Asia
Underweight

 

Overweight” implies a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

Underweight” implies a negative tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

Neutral” implies neither a particularly negative nor a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.

View on this asset class has been upgraded

View on this asset class has been downgraded

This document or video is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document or video is distributed and/or made available by HSBC Bank Canada (including one or more of its subsidiaries HSBC Investment Funds (Canada) Inc. (“HIFC”), HSBC Private Investment Counsel (Canada) Inc. (“HPIC”) and HSBC InvestDirect division of HSBC Securities (Canada) Inc. (“HIDC”)), HSBC Bank (China) Company Limited, HSBC Continental Europe, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited (UAE), HSBC UK Bank Plc, HSBC Bank Malaysia Berhad (127776-V)/HSBC Amanah Malaysia Berhad (807705-X), HSBC Bank (Taiwan) Limited, HSBC Bank plc, Jersey Branch, HSBC Bank plc, Guernsey Branch, HSBC Bank plc in the Isle of Man, HSBC Continental Europe, Greece, The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India), HSBC Bank (Vietnam) Limited, PT Bank HSBC Indonesia (HBID) and HSBC Bank (Uruguay) S.A. (HSBC Uruguay is authorised and oversought by Banco Central del Uruguay), (collectively, the “Distributors”) to their respective clients. This document or video is for general circulation and information purposes only.

The contents of this document or video may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document or video must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document or video will be the responsibility of the user and may lead to legal proceedings. The material contained in this document or video is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document or video 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. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. HBAP and the Distributors do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document or video has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed are based on the HSBC Global Investment Committee at the time of preparation, and are subject to change at any time. These views may not necessarily indicate HSBC Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document or video 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. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. 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. Investments are subject to market risks, read all investment related documents carefully.

This document or video provides a high level overview of the recent economic environment and has been prepared for information purposes only. The views presented are those of HBAP and are based on HBAP’s global views and may not necessarily align with the distributors’ local views. It 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. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Before you make any investment decision, you may wish to consult a financial adviser. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether the investment product is suitable for you. You are advised to obtain appropriate professional advice where necessary.

We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.

Important Information about HSBC Global Asset Management (Canada) Limited (“AMCA”)

HSBC Asset Management is a group of companies, including AMCA, that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings plc. AMCA is a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.

Important Information about HSBC Investment Funds (Canada) Inc. (“HIFC”)

HIFC is the principal distributor of the HSBC Mutual Funds and offers the HSBC Mutual Funds and/or the HSBC Pooled Funds through the HSBC World Selection® Portfolio service. HIFC is a subsidiary of AMCA, and indirect subsidiary of HSBC Bank Canada, and provides its products and services in all provinces of Canada except Prince Edward Island. Mutual fund investments are subject to risks. Please read the Fund Facts before investing.

®World Selection is a registered trademark of HSBC Group Management Services Limited.

Important Information about HSBC Private Investment Counsel (Canada) Inc. (“HPIC”)

HPIC is a direct subsidiary of HSBC Bank Canada and provides services in all provinces of Canada except Prince Edward Island. The Private Investment Counsel service is a discretionary portfolio management service offered by HPIC. Under this discretionary service, assets of participating clients will be invested by HPIC or its delegated portfolio manager, AMCA, in securities, including but not limited to, stocks, bonds, mutual funds, pooled funds and derivatives. The value of an investment in or purchased as part of the Private Investment Counsel service may change frequently and past performance may not be repeated.

Important Information about HSBC InvestDirect (“HIDC”)

HIDC is a division of HSBC Securities (Canada) Inc., a direct subsidiary of, but separate entity from, HSBC Bank Canada. HIDC is an order execution only service. HIDC will not conduct suitability assessments of client account holdings or of the orders submitted by clients or from anyone authorized to trade on the client’s behalf. Clients have the sole responsibility for their investment decisions and securities transactions.

The following statement is only applicable to HSBC Bank (Taiwan) Limited with regard to how the publication is distributed to its customers: HSBC Bank (Taiwan) Limited (“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 guarantee on the management or operation performance of the trust business.

THE CONTENTS OF THIS DOCUMENT OR VIDEO HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION.

YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT OR VIDEO. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT OR VIDEO, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.

© Copyright 2022. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.

No part of this document or video may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.