Top of main content

Build resilience with quality and income

01/06/2022
Commodities
FX
Bonds
Global Equities

Key Takeaways

  • Growth is slowing but remains resilient in the US and ASEAN. We don’t expect a global recession this year and remain Neutral on equities. We upgrade HK stocks to Overweight but downgrade European Consumer discretionary and Financials, while upgrading Consumer staples globally to add resilience.
  • The US Federal Reserve’s May meeting has lowered expectations on more aggressive rate hikes. We see value in short-dated corporate, EM hard currency and quality high-yield bonds. Rising real yields favour value and high dividend stocks.
  • We downgrade Taiwan equities and Asian Technology due to the headwinds in the  smartphone and semiconductor space. A balanced approach which captures the strengths of both value and growth stocks, with a focus on quality, is preferred. 

Talking Points

1.  What is the growth outlook for the second half?

  • US Inflation dropped to 8.3% in April (8.5% in March) but remained elevated in the UK and Eurozone. We think global inflation will gradually ease, albeit remaining high short-term.
  • High inflation affects profit margins and consumption which weigh on growth. Recent market sell-offs reflect concerns about a hard landing, but we don’t think a global recession is likely as some regions and sectors remain resilient.
  • The strong labour market and energy-related activity support a rebound in the US in H2. In Asia, ASEAN sees positive consumption and earnings momentum. We upgrade HK stocks to Overweight due to the economic reopening and attractive valuations (Forward P/E at 14.1x). Mainland China’s policy stimulus are likely to revive growth in H2. In view of slowing growth in Europe, we downgrade Consumer discretionary and Financials there, and upgrade Consumer staples (Global, Europe & Asia) to be more defensive.

Source: HSBC Global Research, HSBC Global Private Banking as of 18 May 2022.

2.  What does higher real yield mean to investors?  

  • As expected, the Federal Reserve raised policy rates by 0.5% at its May meeting, and will reduce the size of its balance sheet from June onwards to curb inflation.
  • Expectations on more aggressive interest rate hikes are lower. Following the recent spike in bond yields, we see value in short-dated corporate bonds, particularly in the investment-grade space, as well as EM hard currency bonds and quality high yield.
  • We believe real yields could continue to rise, which will support value stocks and high dividend stocks for their stable earnings. Rising real yields is a headwind for gold but should keep the US dollar at elevated levels.

Source: Bloomberg, HSBC Global Private Banking as of 11 May 2022. Past performance is not a reliable indicator of future performance.

3. Should we move out of growth stocks?

  • Growth stocks are characterised by their higher-than-average earnings potential with key drivers such as innovation (e.g. Technology), while value stocks are attractive for their low valuations and dividend payouts (e.g. Healthcare). Investors generally prefer value stocks in a rising rate environment.
  • Due to the concerns over smartphone demand, logistics and supply chain issues in the semiconductor space, and slower growth in consumer electronics products, we downgrade Taiwan equities and Asia Technology to Neutral. However, it does not mean that we should move out of growth stocks completely. For example, we remain Overweight on Global and US Technology, where we see opportunities in automation and artificial intelligence.
  • A balanced approach to capturing resilient income from value stocks while not missing out on opportunities in the growth space is preferred. Quality is key for both investment styles.

Source: Refinitiv, HSBC Global Private Banking as of 17 May 2022.
Past performance is not a reliable indicator of future performance.

Asset Class Views

 

Our latest house view on various asset classes

Global

The global momentum is clearly slowing, but the earnings season has shown that many quality companies still manage to achieve solid profit growth in spite of the cost challenges.

overweight
Neutral
6-month view
United States

They are still our biggest equity overweight due to their size and quality character. Consumer demand and labour markets remain strong and we expect the economy to rebound in Q2 and Q3.

overweight
Overweight
6-month view
United Kingdom

Attractively valued but the high cost of living weighs on consumption and local growth. 

Neutral
Neutral
6-month view
Eurozone

ECB tightening, high energy prices and the region’s geographical proximity to the Ukraine war warrant our underweight position. 

Underweight
Underweight
6-month view
Japan

Autos and industrials are hit by supply chain issues but capital goods see good demand.

 Neutral
Neutral
6-month view
Emerging Markets (EM)

Fed tightening is a concern while geopolitical tensions cause repositioning. Asia is relatively more resilient with its healthy economic outlook.

Neutral
Neutral
6-month view
EM EMEA

The region continues to be impacted by a refugee crisis, while high energy prices may dampen growth. 

Underweight
Underweight
6-month view
EM Latam

Commodity exposure benefits the region but there are risks around rate hikes and politics.

Underweight
Neutral
6-month view

Asian ex-Japan

This is our most preferred EM region with fewer rate hikes than elsewhere and growth in ASEAN and Hong Kong remain solid.  

overweight
Overweight
6-month view
China

China’s slowing economy has taken a further knock from Covid-related restrictions, but we think that any easing of those restrictions and the lagged effect of policy stimulus should help the economy to recover later in the year. 

Neutral
Neutral
6-month view
India

The high commodity price burden weighs on growth. The RBI is expected to continue on the path of raising policy rates amid inflationary pressures. Fiscal deficit could be higher than expected. 

Neutral
Neutral
6-month view
Hong Kong

The economic reopening, cheap valuations and its higher exposure to the defensive sectors are key drivers for an overweight position. Retail, retail property and financial companies should stand to benefit.

 Neutral
Overweight
6-month view
Singapore

We see positive economic recovery momentum on the back of consumption recovery, tourism rebound and infrastructure boom. 

overweight
Overweight
6-month view
South Korea

The country’s reliance on global trade is a challenge but the economy is shifting its growth drivers from exports to domestic consumption, with more easing pandemic measures put in place. 

Neutral
Neutral
6-month view
Taiwan

There are concerns over smartphone demand, logistics and supply chain issues in the semiconductor space, as well as slower growth in consumer electronics products.

Overweight
Neutral
6-month view

Developed markets (DM)

Although yields have backed up, we see better opportunities for returns elsewhere.  

Underweight
Underweight
6-month view
United States

Although inflation may be peaking, it is likely to remain elevated. While the yield curve is no longer inverted, it remains very flat as the market has already priced in many hikes. We see more value in the short end, keeping duration low.

Neutral
Neutral
6-month view
United Kingdom

Although the market seems to be priced in for more hikes than the economy can handle due to weak growth, inflation in the UK is likely to rise even further, implying that Gilt volatility may remain elevated.

Neutral
Neutral
6-month view
Eurozone

Europe is more vulnerable to downside risks to growth linked to high commodity prices and spillover from the Russia-Ukraine war. Meanwhile inflation has resulted in a more hawkish ECB, with current valuations not appealing enough.

Underweight
Underweight
6-month view
Japan

The ultra loose monetary policy and a weaker yen are set to further steepen the longer-end of the government bond segment.

Underweight
Underweight
6-month view
Emerging Markets (local currency)

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

Neutral
Neutral
6-month view
Emerging Markets (Hard currency)

Amid higher Treasury volatility, we still find yield but remain selective. 

neutral
Neutral
6-month view

Global investment grade (IG)

Investment grade bonds are key for portfolio diversification and should be resilient as risk appetite is challenged. We focus on carry opportunities at the short end of the corporate credit curve. 

Neutral
Overweight
6-month view
USD investment grade (IG)

US jobs and consumer spending data have been strong, while corporate earnings are resilient. All in yields have become attractive again with many rate hikes priced in, and we see opportunities in short-dated quality bonds.

Neutral
Overweight
6-month view
EUR and GBP investment grade (IG)

The recent cheapening of Eurozone credit represents an opportunity for buy-and-hold investors, while GBP credit has proven to be relatively resilient. We emphasise however a preference for short-dated, quality issuers.

Neutral
Overweight
6-month view
Asia investment grade (IG)

Asian credit market offers attractive carry opportunities and stay relatively resilient to the energy supply shock. We prefer quality issuers in Indonesian hard currency bonds, Chinese SOEs, Chinese financials, etc. 

overweight
Overweight
6-month view
Global high-yield (HY)

Their spreads are well compensated for the relatively low level of default rates. Short-dated bonds have already priced in many rate hikes and we focus on quality within the HY universe. 

overweight
Overweight
6-month view
US high-yield (HY)

Supported by a recovery of economic activity and deleveraging, the average net leverage of US high-yield companies has improved with default rates below 1%.

overweight
Overweight
6-month view
European high-yield ex UK (HY)

We favour European and UK high yield for their strong balance sheets across the energy and consumer oriented sectors but in a very selective manner.  

overweight
Overweight
6-month view
Asia high-yield (HY)

Cheap valuations and expectations of easing measures are positive for China’s high-yield property sector but sentiment remains fragile. Short-dated bonds and quality issuers are preferred.

overweight
Overweight
6-month view

Gold

Despite geopolitics and heightened uncertainty, rising real rates and strong dollar are headwinds for gold. 

overweight
Neutral
6-month view
Oil

High price levels reflect supply concerns but demand is starting to decline.

 Neutral
Neutral
6-month view

Sector Views

 

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

Inflation, rising financing and energy costs weigh on consumer demand in Europe. Margins remain under pressure from same factors plus labour shortages. Pent-up demand provides some room for optimism with many companies raising prices to recover higher input costs (Q1 results). Earnings growth is likely to be challenging.

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

Rate hike expectations under soaring inflationary pressures support banking stocks. In Asia, low valuations make the sector attractive, while US Financials are trading at a significant premium to their peers after many quarters of strong results. We downgrade Europe given the macroeconomic and geopolitical challenges.

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

Slowing growth and rising input costs (commodities, labour and energy) weigh on profits and sentiment. This should accelerate the trend for greater automation. Supply chain issues persist. Despite lower valuations due to the slowing growth environment, sentiment is likely to remain subdued.

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

The sector in Asia is under pressure from the slowing growth in the US, China and Europe. Valuations remain elevated but are not rich. Digitalisation, electrification and automation should drive long-term, above average growth for the next decade. We prefer companies with strong cash-generative businesses and market positions.

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

The sector benefits from steady cash flows and growth from increased data usage as more activity shifts on-line and business digitises. The 5G roll-out is positive for telecom equipment providers but neutral/negative initially for service providers. As the 5G roll-out in Asia is well advanced, we see less attractive opportunities there.

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

Commodity prices are supported by under-investment to increase capacity for surging demand as economies reopen, as well as ongoing geopolitical instability. The outlook for chemical and cement stocks is mixed given rising feedstock and energy prices, but mining stocks are supported.

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

The demand for private residential real estate is supported by high savings rate and lower interest rates, while commercial real estate suffers 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. Valuations are somewhat elevated so we prefer companies with strong brands and/or pricing power which can protect margins and earnings as inflationary pressures mount. We upgrade Europe and Asia as these stocks may show greater resilience.

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

Geopolitical uncertainties, 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

Pharma stocks are better positioned with their strong cash flows and resilient business models. While the medical technology sector should benefit from pent-up demand for elective surgical procedures in 2022/23, the biotechnology sector provides more speculative investment opportunities with their innovative medicines. 

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

Although renewable stocks are gaining 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
Neutral

 

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.