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HSBC Jade Perspectives – Q2 2020

25/03/2020
Coronavirus
Equities
Trade
Investment
US
Fixed Income

The best-laid plans...

HSBC Jade Perspectives is a publication specifically created for our Jade clients. It explores the key global themes relevant to today’s investors, while explaining their diverse implications.

The coronavirus outbreak is a terrible tragedy that has impacted individuals, families and communities around the world. For all of us, the priority is now to help and protect our fellow human beings, and we fully support the measures being taken by authorities around the world. 

From an investment perspective, the impact of the coronavirus shows how even the best-laid plans can go “out the window” when the unexpected happens. The risks are real and multi-faceted. Supply chains are at risk around the world. Consumers are no longer travelling or spending. Businesses, at best, are being forced to find ways of operating with large parts of their workforce unable to come to work. At worst, they are struggling to stay afloat. A recession looks likely at this point. 

The encouraging news is that authorities are on the front foot. For instance, the US Federal Reserve took the bold step of cutting interest rates to zero in an emergency coronavirus move. Other central banks around the world have made similar moves in a concerted bid to stabilise economic activity and sentiment. 

Fiscal policy will also have a role to play. Governments around the world have already announced their intention to provide direct stimulus to vulnerable businesses and consumers. This will be instrumental in keeping the global economy running until the worst of the outbreak passes. The livelihoods of some consumers and smaller businesses already look set to be dependent on these policies. Large companies are not likely to be spared either, with some already downgrading earnings forecasts for the year.

 We’ve dedicated this issue to helping you understand the likely economic and financial impact of the virus, and hope that while reading, you’ll be reminded to take steps to ensure your portfolio is protected from the risks of further volatility. 

This environment requires us to rethink our investment thesis for the short term. Volatility will continue over the next few months and we have taken the decision to reduce risk in portfolios over the short term. In the long run, we hope to convince you that uncertainty often breeds opportunity and that some attractive asset classes are now cheaper due to fear of the outbreak. Should policy responses be successful, these investments will likely bounce back and perform well. 

At the very least, we strongly believe investors should not simply sell now, just because prices appear to be dropping. As history has shown, any rash decision to sell during volatility can often mean missing out on a market rebound. 

Please stay safe and remember that investing is a long-term game, even if it’s sometimes difficult to look beyond the “here and now” of the outbreak.

 

Coronavirus Volatility:

1. Take a breath and don’t panic

  • One of the worst things an investor can do right now is sell all, or even a substantial chunk, of their equities, especially if they have suffered big losses.
  • Market movements during volatility tend to be larger than normal, so you run the risk of missing out on the rebounds if you cash out.
  • “Timing the market” is notoriously difficult. Focus on “time in the market” instead.

 

2. Prepare for volatility over the coming months

  • Despite being positive on equities for the long term, we expect volatility over the coming months.
  • We have amended our investment views to recognise the short-term risks.
  • We have downgraded Equities from Overweight to Neutral in the short term, and upgraded Investment Grade Corporate Bonds from Underweight to Neutral.

 

3. Look for “smart diversifiers”

  • Traditional “safe-haven” investments are now very expensive and investors should consider additional ways of diversifying.
  • A multi-asset portfolio approach, where investment decisions are made by full-time professionals against your risk target or budget, would be a smart option right now.
  • If available, another option could be to include alternative investment strategies in a diversified portfolio. These aim to deliver absolute returns uncorrelated to market conditions.

4. Consider opportunities for the long term

  • Long-term prospective returns on equities are now more attractive for investors who can stomach short-term volatility.
  • Within equities, Emerging Market (EM) equities,particularly Asia, are especially attractive.
  • Emerging Markets have more scope for policy actions than a lot of the Developed Market economies.

Coronavirus in the spotlight

Key takeaways

 

Strategically, over a longer time horizon, we are still Overweight1 on equities and the selloff has now created a more attractive entry point for investors who can stomach short-term volatility.

Tactically, we are now more cautious over the next 3 months:

  • We are downgrading global equities from Overweight to Neutral, on the expectation that corporate earnings will deteriorate significantly in the short term, particularly in developed markets.
  • We prefer higher quality bonds, and we are upgrading investment grade corporate bonds from Underweight to Neutral.

Investors come in many shapes and sizes, but right now they all have one thing in common: fear. The global stock market is down more than 20% for the year now2. The question of whether US stocks can sustain their bull run has been answered with a resounding “no”. While few would have predicted that a global pandemic would trigger the selloff, the US is now formally in bear-market territory, having fallen over 20% from its peak in February.

The selloff has been widespread across most markets globally, with even traditionally “defensive” sectors like healthcare or utilities falling victim. The selloff has been nondiscerning across different industry sectors. On the flipside, any government bond that’s considered even remotely safe has been in high demand, and bond yields are now even lower than before. Witness the proverbial “flight to safety”.

 

Four themes to guide investors over the coming months

  • Take a breath and don’t panic
  • Prepare for volatility over the coming months
  • Look for “smart diversifiers”
  • Consider opportunities for the long term

At a glance

  • COVID-19 is having a significant impact on the global economy
  • Growth in mainland China may start to recover in the first half of 2020 but take longer to normalise in the US and Europe
  • Policymakers globally have announced significant stimulus measures to support markets, but more will be required

How should we think about our investment portfolios in this environment?

Key takeaways

  • A global recession is now the most likely outcome.
  • We expect the economic outlook to remain uncertain, and volatility in markets will be elevated.
  • The significant moves seen in financial markets should create opportunities for long-term investors.

The worldwide spread of COVID-19 has created unprecedented volatility in financial markets, driven by fears over the economic impact and intense levels of uncertainty about what happens next. While the economic environment remains very difficult and the way forward is unusually uncertain, the significant moves that we have seen in financial markets should create opportunities for long-term investors.

  • The economic outlook is very challenging
  • Policy provides support
  • Uncertainty is here to stay, but there is a silver lining

This document 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 is distributed by HSBC Bank Canada (including its subsidiaries HSBC Investment Funds (Canada) Inc. (‘HIFC’), HSBC Private Wealth Services (Canada) Inc. (‘HPWS’), and the HSBC InvestDirect (‘HIDC’) division within HSBC Securities (Canada) Inc.), HSBC Bank (China) Company Limited, HSBC France, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited (UAE) and HSBC UK Bank Plc (collectively, the “Distributors”) to their respective clients. This document is for general circulation and information purposes only. 

The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document 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 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 forwardlooking statements. This document 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 herein have been sourced from HSBC Global Asset Management at the time of preparation, and are subject to change at any time. These views may not necessarily indicate HSBC Global Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Global 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 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/regions with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries/regions in which they trade. Investments are subject to market risks, read all investment related documents carefully. 

This document provides a high level overview of the recent economic environment and has been prepared for information purposes only. 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 Global Asset Management is a group of companies 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 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.

Important Information about HSBC Private Wealth Services (Canada) Inc. (“HPWS”)

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

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No part of this document 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. 

Disclosure appendix

1. This report is dated as at 18/03/2020. 

2. All market data included in this report are dated as at close 17/03/2020, unless a different date and/or a specific time of day is indicated in the report. 

3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 

4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument.

Disclaimer 

This document 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 is distributed by HSBC Bank Canada, HSBC Bank (China) Company Limited, HSBC France, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited and HSBC UK Bank plc (collectively, the “Distributors”) to their respective clients. This document is for general circulation and information purposes only. This document is not prepared with any particular customers or purposes in mind and does not take into account any investment objectives, financial situation or personal circumstances or needs of any particular customer. HBAP has prepared this document based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information. The contents of this document are subject to change without notice. HBAP and the Distributors are not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use of or reliance on this document. HBAP and the Distributors give no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document. This document is not investment advice or recommendation nor is it intended to sell investments or services or solicit purchases or subscriptions for them. You should not use or rely on this document in making any investment decision. HBAP and the Distributors are not responsible for such use or reliance by you. You should consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this document. You should not reproduce or further distribute the contents of this document to any person or entity, whether in whole or in part, for any purpose. This document may not be distributed to any jurisdiction where its distribution is unlawful. 

© Copyright 2020. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. 

No part of this document 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.

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