HSBC Holdings Plc’s headquarters building in Hong Kong, China.
Paul Yeung | Bloomberg | beautiful pictures
LONDON – Theo HSBC Bank Asset Management.
In its investment outlook for 2022, the bank said the bountiful returns investors have enjoyed over the past 18 months are largely due to “borrowing from the future”.
HSBC Asset Management’s head of global strategy Joseph Little noted that bond yields, spreads and risk premiums are all falling. The risk premium is the amount of return an asset gives above the risk-free rate of return.
As a result, returns across many asset classes are lower than they were at the start of the year, he added.
“The complicated macro outlook is exacerbated by higher valuations and lower margin of safety in the market. We should expect cross-asset volatility to increase,” Little said.
HSBC expects single-digit earnings growth as economic expansion slows due to supply-demand imbalances and gradual normalization of monetary policy. It shows GDP growth slowing to 4-5% worldwide, with the UK and China at the top of that range and the US and Europe near the bottom.
Big risks
The two main demand-side risks are a Covid-19 resurgence or a “hard landing” in China, where credit and tightening regulations continue to limit economic activity, Little said.
“We expect a range of targeted easing measures to be introduced, but the commonwealth strategy means investors need to accept the underlying growth in China,” he added. is in the 5% region.
On the supply side, the main risks are that supply chains are taking longer to rebuild than expected for currencies and that the impact of distortions in the global labor market remains, Little said. . “There is evidence of post-Covid scarring, meaning the ‘equilibrium unemployment rate’ is higher than most economists assume.”
He added: “This could have serious social implications and mean that central banks are wrong on the issue of inflation. Policy will have to adjust to a much more aggressive direction, to leaving limited spots in the market for investors”.
But despite economic and market uncertainty, HSBC suggests that the broad growth/inflation combination remains favorable in the aftermath of the “breakfast economy” in 2021.
“We think the basic regime looks like the 1990s, with continued recovery, technological innovation, increased capital spending, and policy experimentation,” Little said.
“If that happens, then in Q4 2022 inflation will be at 2-2.5%. For 2023-25, we expect 2-3% inflation.”
Weightlifting Strategy
HSBC still sees a strong case for global equities, as equities often outperform bonds when the labor market is improving, as is the case now when economies recover from a recession. their employment pandemic.
“For now, the financial conditions are still easy, the equity premiums are reasonable, the earnings are continuing to grow, and that’s enough for stocks to outperform bonds,” Little said.
He added that rising bond yields should favor late-cycle and value stocks – those that are said to be trading bearish relative to their fundamentals – many of which are found found in Europe and Asia.
However, in the face of a complex set of macroeconomic challenges, HSBC is choosing a cautious approach. A barbell strategy tends to involve increasing weight on two separate groups of stocks to hedge against uncertainty.
For HSBC, this includes defensive stocks – which provide consistent dividends and earnings regardless of the market’s broader trajectory – such as quality companies and those tied to the process. ESG transformation and the digital economy, along with cyclical names.
Fixed Income and Alternatives
HSBC also said it preferred the look and feel of fixed-income emerging markets and Chinese yuan-denominated bonds to global bonds, both of which aim to “diversify their investment portfolios.” and the ability to deliver unsurpassed.”
“Despite the current risks, the future return profile of Asian credits looks very attractive compared with the US and Europe,” Little added.
Among the alternatives, HSBC Asset Management will focus on strategies that support cost-effective hedging against inflation, involving areas underpinned by “real” assets such as real estate and real estate. global and Asian real estate and infrastructure.
“The re-greening of the world, the transition to net zero as well as the macro-cross currents will support selected commodities, including carbon, copper and uranium,” Little said.
“Meanwhile, allocations for venture capital and climate technology are a sensible way to capture innovation and a way to manage the fear of missing out.”
