Fear in the Markets: The Smart Investor’s Response
Financial markets are delicately balanced
Which way will they tip?
Imagine our current volatility as a weighing scale. On one side are investors, fearful for the global economy and wondering how much worse the virus will get.
On the other side, we have the measures taken by authorities around the world. These include control and limitation measures to limit viral spread, monetary stimulus to lower the cost of corporate debt and fiscal stimulus to support vulnerable consumers through this challenging period. The authorities have not held back so far, with the US Federal Reserve cutting interest rates to zero and the European Central Bank increasing quantitative easing. Attention is now focussed on how much fiscal stimulus governments will inject.
Investors eagerly process each new bit of information. When the implications of a new development are unclear (as in the case of coronavirus), they may well feel that the only safe option is to sell now and figure it all out later. We should therefore expect markets to be choppy and volatile in the short term, as further news breaks about the virus and its economic and financial implications.
Four themes to guide investors over the coming months
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’ve already suffered significant losses.
In volatile times, market movements tend to be larger than normal – up as well as down. So, if you’ve cashed out, you risk missing out on large gains upwards. In fact, missing even one day of major gains can be damaging. According to data from 2004 to 20142, portfolios that missed out on the top 20 performing days during this period would have been significantly harmed.
Whereas “timing the market” is notoriously difficult, the right strategy is, in fact, to focus on “time in the market”.
2The period 2004 to 2014 was selected because it includes the Global Financial Crisis and European Debt Crisis, along with other volatile periods.
We expect the economic outlook to remain uncertain, with see-sawing markets and persistent volatility, and have therefore made several short-term changes to our investment views (covering 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 still think equities are an attractive investment over the long term but caution is warranted for now. We stress this is a modest reduction and NOT a call to sell everything.
We are upgrading investment grade corporate bonds from Underweight to Neutral. With yields on government bonds now even lower, the excess yield available on investment grade corporate bonds looks more attractive. Corporate bonds are also more reasonably priced, and reflect some of the risks of a global recession, as well as deterioration in corporate earnings.
Although we’re maintaining our Underweight position on core government bonds, we acknowledge that they still have a place in a diversified portfolio. While these assets have performed well during volatile times, with their yields at an unprecedented low we do have concerns about their ability to rally much further (and offer the same diversification benefits). Nonetheless, they should continue to hold up well in the current volatility.
It’s vital that you take steps now to optimise your portfolio, while ensuring the right level of exposure for your risk tolerance. That means including high quality bonds, even though valuations on core government bonds are particularly expensive right now. These allocations should be looked on as a form of portfolio insurance, particularly for the short-term.
Since traditional safe-haven assets like core government bonds are so expensive, there’s nowhere cheap or easy to hide. We’ve already mentioned investment grade corporate bonds as an alternative, but it must be stressed that since these bonds are issued by companies and not governments, they do have a higher correlation with the stock market.
Because of this, investors should consider additional ways of diversifying. Alternative investment strategies, which aim to deliver absolute returns uncorrelated to market conditions, should be considered if available.
Gold is another asset that traditionally performs well during volatility, although prices are currently very high, making it hard to be bullish. But gold is still a useful store of value in times like these and we expect prices to be supported by even lower interest rates and continued short-term volatility.
If neither of these approaches is readily available, a more traditional multi-asset portfolio approach, where investment decisions are made by full-time professionals against your risk target or budget, would be a smart option amid the current uncertainty.
With uncertainty comes opportunity. This matters to long-term investors because cheaper entry points to global equity markets now exist. This means that long-term prospective returns on equities are now higher than they were before, making them more attractive for investors with a longer-term time horizon. Remember that it’s extremely difficult to time the market and call the absolute bottom so it’s worth considering the opportunities.
Within equities, we think that Emerging Market (EM) equities, particularly in Asia are especially attractive from a long-term perspective. Emerging Markets have more scope for policy action than, say, the Eurozone and Japan, and indeed we’ve already seen authorities in China and other Asian markets take aggressive fiscal and monetary action to support the economy. Lower energy prices should also help EM markets that are “nonpetro” economies.
Because Asia was forced to confront the coronavirus a few months before the rest of the world, the continent is arguably closer to returning to some semblance of normal life. This can only be positive Asian economies and, correspondingly, for EM and Asian investments.
WARNING: THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN THE PEOPLE’S REPUBLIC OF CHINA OR ANY OTHER JURISDICTION. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.
This document has been issued by HSBC Bank (China) Company Limited (the “Bank”) in the conduct of its regulated business in China. It is not intended for anyone other than the recipient. 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 to the United States, Canada or Australia or to any other 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.
This document has no contractual value and is not and should not be construed as an offer or the solicitation of an offer or a recommendation for the purchase or sale of any investment [in any jurisdiction in which such an offer is not lawful] or subscribe for, or to participate in, any services. The Bank is not recommending or soliciting any action based on it.
The information stated and/or opinion(s) expressed in this document are provided by HSBC Bank (China) Company Limited. We do not undertake any obligation to issue any further publications to you or update the contents of this document and such contents are subject to changes at any time without notice. They are expressed solely as general market information and/or commentary for general information purposes only and do not constitute investment advice or recommendation to buy or sell investments or guarantee of returns. The Bank has not been involved in the preparation of such information and opinion. The Bank makes no guarantee, representation or warranty and accepts no responsibility for the accuracy and/or completeness of the information and/or opinions contained in this document, including any third party information obtained from sources it believes to be reliable but which has not been independently verified. In no event will the Bank or HSBC Group be liable for any damages, losses or liabilities including without limitation, direct or indirect, special, incidental, consequential damages, losses or liabilities, in connection with your use of this document or your reliance on or use or inability to use the information contained in this document.
The Bank and HSBC Group and/or their officers, directors and employees may have positions in any securities or financial instruments mentioned in this document (or in any related investments) (if any) and may from time to time add to or dispose of any such securities or financial instruments or investments. The Bank and its affiliates may act as market maker or have assumed an underwriting commitment in the securities or financial instruments discussed in this document (or in related investments) (if any), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.
The information contained within this document has not been reviewed in the light of your personal circumstances. Please note that this information is neither intended to aid in decision making for legal, financial or other consulting questions, nor should it be the basis of any investment or other decisions. You should carefully consider whether any investment views and investment products are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. The investment decision is yours but you should not invest in any product unless the intermediary who sells it to you has explained to you that the product is suitable for you having regard to your financial situation, investment experience and investment objectives. The relevant product offering documents should be read for further details.
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. Such statements do not represent any one investment and are used for illustration purpose only. Customers are reminded that there can be no assurance that economic conditions described herein will remain in the future. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We can give no assurance that those expectations reflected in those forward-looking statements will prove to have been correct or come to fruition, and you are cautioned not to place undue reliance on such statements. We do not undertake any obligation to update the forward-looking statements contained herein, whether as a result of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in the forward-looking statements.
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. Investment schemes are subject to market risks. You should read all scheme related documents carefully.
Copyright © HSBC Bank (China) Company Limited 2020. All rights reserved. No part of this publication 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 HSBC Bank (China) Company Limited