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House views

10/09/2020

Macro Outlook

  • With lockdowns having mostly been lifted, economic activity has picked up sharply across a range of economies, albeit from historically depressed levels. However, the pace of recovery remains uncertain, especially beyond Q3
  • Our most likely scenario is a “swoosh” type recovery for the global economy; after a sharp rebound, economic activity is likely to recover more gradually. Developed markets are unlikely to reach pre-crisis levels of activity until 2022
  • Following the initial shock, we are already witnessing the emergence of relative winners (China, industrialised Asia) and losers (emerging markets ex Asia, smaller oil exporters, frontier economies, and the UK)
  • The global economy needs ongoing support and positive virus developments. The biggest downside risks to our “swoosh” scenario are fiscal policy mistakes or renewed lockdowns across economies

Investment views

Equities(>12 months)

The Covid-19 pandemic represents a very significant challenge for the global economy. However, we believe the equity risk premium (excess return over risk-free assets) remains attractive amid lower developed market government bond yields

Substantial policy easing has reduced downside tail risks

We believe the market is pricing in our baseline economic scenario of a “swoosh” recovery, although there are some tentative signs of the more optimistic rapid recovery scenario being discounted

Exposure to big tech companies is also beneficial in our view

The EU’s new joint recovery fund can help support the medium-term growth prospects of more vulnerable European economies

We also think the fund should help diminish the risk of more economically fragile member states exiting the Eurozone, which can help compress the “political risk premium” we believe is embedded in the pricing of European risk assets

Furthermore, the ECB has so far been proactive and innovative in its policy approach

The UK government and the Bank of England (BoE) have implemented a comprehensive and coordinated package of economic stimulus measures aimed at supporting businesses and employment

Japanese equities are attractively valued although low structural growth and constrained BoJ policy space means we hold a neutral view

Japan (along with other industrialised Asian economies) has made good progress in tackling the spread of Covid-19 

We estimate valuations are broadly similar to DM equities. In our view, the bright spot is EM Asian markets which can benefit from China’s growth recovery and further policy actions

Ultra-loose Fed policy and lower oil prices are significant tailwinds to many EM economies

Low commodity prices is a major headwind to already weak growth momentum in Latin America and Russia. CEE economies are vulnerable to a manufacturing slowdown in Europe given supply chains

Many EM economies (mainly outside of Asia) have limited capacity to manage the current health and economic crises

  • 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 2020. 
  • 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 August 2020.

 

Source: HSBC Global Asset Management. As at 1 September 2020. The views expressed were held at the time of preparation, and are subject to change.

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