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Investment Outlook: HSBC Perspectives Q4 2023

8 Sep 2023

Willem Sels

Global Chief Investment Officer, HSBC Global Private Banking and Wealth

Broadening opportunities amid a diverging growth outlook

As we look ahead to the final months of 2023, the financial markets are at a critical juncture: the end of the tightening cycle is upon us, while economic indicators in the US and Asia remain largely constructive. The uneven and weaker-than-expected recovery in China, due to the property slump, has come as a negative surprise. But overall, the global macroeconomic backdrop should support risk-on sentiment and we continue to unlock opportunities by focusing on quality and fundamentals.

We’re pleased that our investment themes for Q3 have been working well and they will continue to set our direction of travel. Still, some fine-tuning is in order to reflect the latest developments in the investment landscape. Compared to what we saw last quarter, earnings and inflation are in much better shape in the US. That allows the Federal Reserve to be one of the first central banks among developed markets to pause interest rate hikes, while others should follow suit before year end.

The good news is that the Fed has managed to complete its tightening mission without triggering a recession and we think the US market will stay in a “soft landing” scenario for the time being. Even though rate cuts are not likely to happen right away (we expect the first one in Q2 2024 in the US), markets may anticipate them sooner rather than later.

What does this mean for investors?

Historically, equities and bonds tend to do relatively well after the final rate hike. Typically, they perform better than cash in the 6 to 12 months following the final rate hike, particularly if a recession is avoided in the process. Therefore, we continue to put our cash to work in high quality medium duration bonds to lock in attractive yields and we also continue to invest in global stocks.

Still, investors need to be selective, considering the wide divergence in fundamentals among markets, sectors and companies, as well as the substantial run-up in equity valuations. Don’t just focus on the valuation numbers, but evaluate the forces driving them up and compare them against previous data. If you do so, you will notice that US equity valuations, which are boosted by technology and the enthusiasm for AI, are still below their 5-year average, while India’s high valuations are supported by their high return on equities. Nevertheless, betting everything on tech or a single market is never a sound  investment strategy, regardless of the market situation. So, here are the four investment themes for the coming quarter.

We look at relative earnings strength, valuations and structural trends for opportunities 

First, we believe the current climate still presents a good time to lock in attractive yields on medium duration investment grade bonds as they are poised to deliver favourable returns when markets start to anticipate rate cuts. US Treasuries also look attractive, especially after yields recently rose a bit too much due to supply concerns and strong economic data.

Second, we prioritise markets with strong fundamentals to maximise potential gains. In developed markets, we prefer US over European equities. In the East, we see upside in India and Indonesia, and take a diversified approach to leverage the local dynamics and ongoing growth trajectory in Asia. Even though the pace of recovery in China is below expectations, policy support and valuations remain compelling, and we think a neutral positioning is now warranted.

We also see sense in broadening our sector exposure to undervalued opportunities. While popular investments often come with a hefty price tag, we believe investors can look beyond the big tech names and find value in quality companies in the “peloton” of consumption, industrials and financial stocks that sit in their slipstream.

Finally, proactive and forward-thinking investors could do well by paying attention to climate change and biodiversity. The public policy and regulation on these issues will fuel a climate of innovation and investment acceleration, creating many opportunities for investors to participate in the coming sustainability revolution.

In conclusion, a clearer outlook for interest rates and inflation should continue to be good for risk assets but, as we know, financial markets can be full of surprises. To find the best risk-adjusted returns in the current environment, we continue to focus on quality investments with strong fundamentals and remain diversified. As always, we strive to help investors identify the upcoming opportunities and risks, so that they can position their portfolios for the best outcomes.

Investment themes

Regional market outlook

Key data to watch

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