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Investment Monthly: Short-term rate volatility offers opportunities in quality bonds

6 Feb 2024

Willem Sels

Global Chief Investment Officer HSBC Global Private Banking and Wealth

Lucia Ku

Global Head of Wealth Insights HSBC Wealth and Personal Banking

Key takeaways

  • As market expectations of a March Fed rate cut are too premature, we believe it will need to be priced out, leading to short-term volatility. But we see dips as buying opportunities as current real yields are too high, and as they fall, bond prices will rise. We prefer quality bonds such as major government bonds (7-10 years), investment grade credit (5-7 years) and Indian local currency bonds.
  • Lower bond yields and rate cuts are positive for equities, which tend to rally before the first rate cut. US equities are supported by strong earnings prospects and secular drivers in the US benefitting IT, Consumer Discretionary and Healthcare. We diversify into the strong growth leaders in Asia, such as India, Indonesia and South Korea. In Europe, we overweight IT, Energy and Healthcare, and upgrade Financials on the improved profitability of banks.
  • As tail risks remain, we will focus on quality assets and diversification. When major central banks are driving market direction, the correlation between equities and bonds tends to be high. Multi-asset portfolios, especially those with access to alternative assets (e.g. hedge funds and private equity) can maximise returns while mitigating uncertainties. 

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