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Bond markets rally

04/09/2019
Commodities
FX
Bonds
Global Equities

In view of recent market volatility, we have developed an Investment Monthly Viewpoint to acknowledge near-term risks and advocate a more cautious approach.    

Investment Monthly Viewpoint

In the last few months, the global economy has stumbled amid worsening sentiment around US-China trade tensions, geopolitical risks and general late-cycle malaise. The global stock market, despite still having returned 12% this year, dipped in August. Although still positive on equities long-term, we advocate a more cautious stance for now. 

We expect volatility to persist in the coming months, as the chess-game of trade tensions and geopolitics is hard for markets to predict. 

Our four-point approach to portfolio strategy in the current climate: 

With volatility likely to persist till year-end, clients should review their exposure to risky assets like equities and high-yield bonds, ensuring risk levels are appropriate. 

Even though interest rates are unattractive, high quality bonds can provide downside protection for your portfolio. Multi-asset portfolios are an easy way to make sure appropriate diversification and risk-levels are maintained. 

With volatility likely to persist till year-end, clients should review their exposure to risky assets like equities and high-yield bonds, ensuring risk levels are appropriate. 

With volatility likely to persist till year-end, clients should review their exposure to risky assets like equities and high-yield bonds, ensuring risk levels are appropriate. 

For more information about our house views, please refer to the Investment Monthly below.

Summary

Macro Outlook

  • Global growth continues to face headwinds from a downturn in the industrial cycle and uncertainty related to trade tensions. Nevertheless, our global Nowcast remains stable at around 2%
  • US growth is being supported by a solid labour market, while there is some evidence that Chinese growth is stabilising. But the latest escalation in US-China tensions keeps risks tilted to the downside
  • US and global recession risk remains modest, although the extent of the downturn in the industrial sector and its impact on services activity requires monitoring. A “no-deal” Brexit is also a key risk going into Q4
  • Positively, muted inflation trends globally keep the door open to monetary policy easing. 

Key Views

  • A surprise escalation of the US-China conflict in early August, and worries that this conflict will damage economic growth, led to a sell-off across risky asset classes in August. Meanwhile, expectations that the Fed will cut rates further supported a rally in bonds
  • This is a tricky environment. The valuation gap between bonds and equities continues to increase, so we continue to be pro-risk in multi-asset portfolios. But we need to be careful of not overextending the risk positioning. The global economy is vulnerable to shocks at this point
  • UK gilts look vulnerable at this juncture. A fiscal easing implemented by the new UK government could challenge gilts’ current pricing

Key Risks

Central Banks

  • At July’s US Federal Reserve (Fed) policy meeting, Chair Powell confirmed that the 25bp rate cut was ‘insurance’ against slower global growth, trade tensions and weak inflation. Further easing is likely in our opinion
  • The European Central Bank (ECB) has struck a dovish tone. The September meeting is likely to see rate cuts and a re-launch of its bond buying programme
  • The Bank of England (BoE) struck a cautious tone at its August’s meeting, with the path for policy ultimately affected by upcoming political developments
  • The Bank of Japan (BoJ) has signalled it could ease policy if economic activity cools. A further trigger could be yen strength
  • Amid trade headwinds, the People’s Bank of China (PBoC) is likely to act to maintain stable credit growth, with targeted support to private sector businesses

 

Source: HSBC Global Asset Management, Global Investment Strategy, September 2019.

All numbers rounded to one decimal place. The views expressed were held at the time of preparation, and are subject to change.

Investment Views

Our valuation work continues to suggest a pro-risk stance in multi-asset portfolios. However, given downside risks to global growth, we should be careful not to over extend the risk positioning

  • Global equities – We remain overweight given valuations continue to improve versus increasingly expensive bonds. But given the global economy is vulnerable to further shocks at this point, we advocate a more cautious tactical (i.e. short-term) stance
  • Government bonds – Relatively unattractive valuations keep us underweight in this segment. Large market moves during a month of poor liquidity, such as August, suggests to us chances of a near-term reversal in yields
  • Corporate bonds – credit assets are overvalued in our view, and we prefer equities. Nevertheless, dovish central bank policy is supportive of this asset class 

 

Source: HSBC Global Asset Management, as at September 2019, and subject to change.

Asset Class Performance at a glance

Global equities fell in August amid an escalation in US-China trade tensions and some disappointing economic data releases in Europe and China

  • Government bonds – US Treasuries and European government bonds rallied on the back of escalating US-China trade tensions, and investor concerns over the global growth outlook
  • Commodities – Brent crude oil prices fell on concerns over global economic growth and rising trade tensions

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 August 2019 in USD, total return, month-to-date terms

Base case views and implications

US

Monthly macroeconomic update

  • A solid labour market continues to support consumer spending. The 12-month moving average of monthly non-farm job creation has held above 185,000 this year
  • However, business investment and trade activity remain subdued amid US-China trade tensions

Base case view and implications

  • US economic growth is likely to moderate this year as fiscal stimulus wanes and the labour market cycle matures
  • A lack of inflation pressure and increased downside risks to growth is likely to translate to Fed rate cuts this year
  • US Treasury valuations are at extreme levels. Equities remain preferable, in our view

Europe

Monthly macroeconomic update

  • Eurozone: Manufacturing data are still very weak, although services sector activity remains resilient for now. Underlying inflation is stuck at about 1%
  • UK: GDP contracted in Q2, although this was mainly due to the unwinding of Brexit related stockpiling in Q1. Labour market strength remains a key support

Base case view and implications

  • Eurozone: European equities remain relatively cheap, supporting our overweight stance
  • UK: We remain comfortable with an overweight view on UK equities given our view of very attractive valuations

Asia

Monthly macroeconomic update

  • China: Disappointing data releases for July, including a weak industrial production print, are likely to see further policy support in the coming months
  • India: GDP growth disappointed in Q2, while risks remain tilted to the downside amid a slow transmission between monetary policy easing and the real economy
  • Japan: Growth remains sluggish amid external headwinds and a loss of momentum in business investment. This year’s consumption tax hike is a risk

Base case view and implications

  • China: Ongoing policy loosening still has the potential to stabilise China’s economy alongside global trade growth
  • India: The long-term structural story remains positive, supporting our overweight view
  • Japan: We believe the valuation of Japanese equities is still attractive while monetary policy is supportive

Other EM

Monthly macroeconomic update

  • Brazil: Positive reform momentum and improving financial conditions support the growth outlook. Recent weakness is mainly due to natural disasters
  • Russia: Activity remains sluggish, amid subdued domestic demand. More positively, the industrial and construction sectors are performing well
  • MENA: growth prospects are constrained by elevated geopolitical risks, a weaker global trade picture and oil production cuts

Base case view and implications

  • The backdrop for EMs has improved amid a dovish Fed and more accommodative EM central banks. We remain overweight EM equities.
  • However, corporate profitability has disappointed this year. Therefore, on a tactical (i.e. near-term) basis, we prefer local-currency government bonds, which also offer higher risk-adjusted prospective returns in our view.

Source: HSBC Global Asset Management. As at 2 September 2019. The views expressed were held at the time of preparation, and are subject to change.

Long-term Asset class positioning tables (>12 months)

Equities

Government Bonds

Investment grade corporate Bonds

High-yield corporate Bonds

Alternatives

Asian assets

 * Non-banking financial company. Source: HSBC Global Asset Management. 

Source: HSBC Global Asset Management. As at 2 September 2019. The views expressed were held at the time of preparation, and are subject to change.

This commentary has been produced by HSBC Global Asset Management to provide a high level overview of the recent economic and financial market environment, and is for information purposes only. The views expressed were held at the time of preparation; are subject to change without notice and may not reflect the views expressed in other HSBC Group communications or strategies. This marketing communication does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. The content 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. You should be aware that the value of any investment can go down as well as up and investors may not get back the amount originally invested. Furthermore, any investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in established markets. Any performance information shown refers to the past and should not be seen as an indication of future returns. You should always consider seeking professional advice when thinking about undertaking any form of investment.

August 2019

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 August 2019

Past performance is not an indication of future returns.

  • Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout August 2019, HSBC Global Asset Management’s long-term expected return forecasts which were generated as at 31 July 2019, 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 July 2019.
  • 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 August 2019. 

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Investment involves risk.  It is important to note that the capital value of investments and the income from them may go down as well as up and may become valueless and investors may not get back the amount originally invested. Past performance contained in this document 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. Past performance information may be out of date. For up-to-date information, please contact your Relationship Manager.

 

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