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Risks abound

11/02/2020
Commodities
FX
Bonds
Global Equities

Summary

Macro Outlook

  • Our global Nowcast picked up throughout Q4 of 2019 and now sits at just above 2%. US growth remains robust at a “trend-like” pace and is expected to remain steady throughout the year amid a strong labour market and consumer sector
  • China’s Nowcast picked up in December, with further policy easing likely. However, any recovery is likely to stall in the near-term given the disruption from the recent coronavirus. The size and duration of the impact on the economy remains highly uncertain
  • Elsewhere, Japan has been a key underperformer, the government has recently announced a large fiscal stimulus package
  • The unbalanced nature of growth leaves the global economy vulnerable to negative shocks. The good news is that low inflation allows policy makers to continue to focus on macro stabilisation

Key Views

  • Geopolitical risks and political uncertainty continue to create episodic volatility. But in our view, moving to a conservative allocation is likely to be costly, as it was in 2019
  • Stocks are not overvalued and there is room for a further rally, in our opinion. But we need to monitor profits trends closely, especially in the US
  • Selected EM risk premiums look relatively high and the economic scenario is becoming more supportive. We continue to overweight EM risk
  • The risk premium in global government bonds is negative. But a drastic sell-off in bonds requires a shift in fiscal policies or a sharp increase in inflation
  • The outlook is mildly bearish for the US dollar given the Fed is on hold. However, the dollar can act as a safe haven if uncertainties rise

Key Risks

Central Banks

  • After three cuts in 2019, the US Federal Reserve (Fed) has signalled a pause with growth at around trend. The bar for a rate cut is far lower than for a rate hike. Our working assumption remains at 0-1 rate cuts in 2020
  • The European Central Bank (ECB) could engage in more aggressive QE and/or deposit rate cuts (due to weak growth and inflation). But splits on the Governing Council may constrain action. A policy review is also underway
  • Weak growth and inflation led to two Bank of England (BoE) MPC members voting for a rate cut in January. Policy could be eased in the coming months
  • Stressing downside risks from abroad, the Bank of Japan (BoJ) has signalled it could ease policy if economic activity cools. A trigger could be yen strength
  • The People’s Bank of China (PBoC) continued easing policy late in 2019 and is likely to offer more support if needed, but large-scale stimulus is unlikely

 

Source: HSBC Global Asset Management, Global Investment Strategy, February 2020

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

Investment Views

We are living in an “age of uncertainty” with persistent uncertainties around the macro outlook. Geopolitical tensions have shown they have the capacity to create episodic volatility in markets. But we think it is important not to be too conservative; this was a costly mistake for investors in 2019

  • Global equities – We remain overweight given the wide valuation gap versus bonds. But, upside potential is likely to be capped by structural uncertainty while downside could be limited by proactive policy makers
  • Government bonds – We are underweight given our estimate of negative bond-risk premiums i.e. we are being penalised for bearing risks related to unexpected changes in interest rates or inflation. Policy is also moving toward fiscal stimulus. We prefer inflation-linked bonds
  • Corporate bonds – Most credit asset classes are overvalued in our view and investors are being penalised for bearing interest rate and inflation risks - we prefer equities. Fundamentals have started to come under pressure

Source: HSBC Global Asset Management, as at February 2020, and subject to change.

Asset Class Performance at a glance

Global equities fell in January as a rally early in the month was offset amid uncertainty following the outbreak of the novel coronavirus (2019-nCoV) in China

  • Government bonds – US and European government bonds rose (yields fell) in January amid investor risk-off sentiment following the outbreak of 2019-nCoV in China, which has spread to countries around the world
  • Commodities – Brent crude oil prices fell sharply amid a weakened demand outlook from China following the outbreak of the coronavirus, which has halted economic activity in the region. Other China sensitive commodities such as iron ore and copper also ended lower

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 (Gold); 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 2020 in USD, total return, month-to-date terms

Base case views and implications

US

Monthly macroeconomic update

  • Accommodative monetary policy and a robust labour market continue to support household spending
  • Activity in manufacturing, business investment and exports has been weak but there are now tentative signs these sectors are beginning to turn

Base case view and implications

  • US economic growth is likely to be around “trend” this year as fiscal stimulus wanes and the labour market matures
  • Fed policy looks to be on hold but risks are still likely tilted to the downside – some loosening this year remains possible
  • US Treasury valuations are high and inflation risks are dismissed. Equities and inflation-linked bonds are preferable

Europe

Monthly macroeconomic update

  • Eurozone: A very weak manufacturing sector continues to be a drag on growth; the services sector continues to show resilience, despite some recent softening
  • UK: Brexit and political uncertainty has negatively impacted confidence and growth, but fiscal spending and looser monetary policy stands ready to offset this

Base case view and implications

  • Eurozone: European equities remain relatively cheap, although we acknowledge headwinds from weak growth
  • UK: We have a strong overweight view on UK equities given very attractive valuations

Asia

Monthly macroeconomic update

  • China: Activity has picked up in recent months amid policy loosening in 2019. However, the impact of the coronavirus remains highly uncertain
  • India: Private sector activity data continues to be weak, although policy easing efforts have been stepped up. Consumption growth may be bottoming
  • Japan: Economic data continues to be impacted by VAT tax hike in Q4 2019 but a recently-announced large fiscal package is encouraging for the outlook

Base case view and implications

  • China: Ongoing policy loosening is a support to China’s economy alongside signs global trade growth is bottoming
  • India: The long-term structural growth potential remains positive, supporting our overweight view
  • Japan: We believe the valuation of Japanese equities is still attractive, although weak economic growth is a downside risk

Other EM

Monthly macroeconomic update

  • Brazil: Positive reform momentum and improving financial conditions could support growth. Monetary policy could be eased further given subdued inflation
  • Russia: Activity remains sluggish, amid subdued domestic demand. Monetary easing and planned infrastructure projects are likely to support growth
  • MENA: Growth prospects are constrained by elevated geopolitical risks and oil production cuts. A pick up in global trade could be supportive for the outlook

Base case view and implications

  • The backdrop for EMs is supported by Fed loosening in 2019 and more accommodative EM central banks
  • We remain overweight EM equities, with signs that EM corporate earnings growth is recovering

Source: HSBC Global Asset Management. As at 3 February 2020. 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. As at 3 February 2020. 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.

January 2020

*Indices expressed as total returns. All others are price returns.

Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 31 January 2020.

Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 31 January 2020.

Past performance is not an indication of future returns.

  • Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout January 2020, HSBC Global Asset Management’s long-term expected return forecasts which were generated as at 30 December 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 December 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 31 January 2020. 

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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.

 

Investment in any market may be extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect influences. Such characteristics can lead to considerable losses being incurred by those exposed to such markets. If an investment is withdrawn or terminated early, it may not return the full amount invested. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability in certain jurisdictions. Narrowly focused investments and smaller companies typically exhibit higher volatility. There is no guarantee of positive trading performance. 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. Mutual fund investments are subject to market risks. You should read all scheme related documents carefully.

 

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