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Hyper sensitive markets

03/03/2021
Commodities
FX
Bonds
Global Equities

Summary

Macro Outlook

  • We are in the restoration phase of the economic cycle. Activity remains below pre-Covid levels in major economies, other than China
  • The pace of recovery will depend on vaccine delivery and continued policy support. For laggard economies, there is scope for cyclical catch-up in 2021. There appears to be some upside for Developed Market consumers
  • Stressed corporate balance sheets, fragile confidence and risks around vaccine rollout and virus mutations mean the global economy needs ongoing policy support
  • Near-term volatility aside, inflation is likely to remain modest over the medium term, but upside risks have increased in the US

House View

  • The key question for investors is: has the market rally in growth-sensitive assets now played out?
  • Consensus beliefs are rooted in sustained policy support and vaccine effectiveness. But with valuations now richer, small disappointments to this scenario can affect markets. We call this “hyper-sensitivity”
  • We now need to take a nimble approach to backing the recovery trade. For example, in Emerging Markets, we think the risk-reward of ASEAN is better than Latam
  • US bond yields have moved higher, driven by a rational re-pricing of inflation risks. It will be important to monitor US Treasury yields closely
  • We still see mild dollar weakness ahead, particularly against EM currencies

Key Risks

Policy outlook

  • Global central banks continue to expand balance sheets, and deploy lower-for-even longer interest rates. We expect limited fiscal drag in DMs this year
  • The US Federal Reserve’s average inflation targeting framework implies willingness to look through higher inflation, and a delayed policy take-off
  • Compared to the West, monetary policy in China is set to become relatively hawkish. Across Asia, incremental stimulus will be more limited
  • US-China relations set to become more rules-based and collaborative under President Biden, with renewed co-operation in some areas

 

Source: HSBC Global Asset Management, Global Investment Strategy, March 2021. The views expressed are those of HSBC Global Asset Management, they were held at the time of preparation, and are subject to change.

House view

The recent market rally has embedded a lot of good news on the growth outlook so even small disappointments could undermine risk asset performance. This market “hyper-sensitivity” means we need to take a more nimble approach to backing the recovery trade

  • Equities – Relative valuations and the ongoing economic recovery amid policy support continue to point to an overweight allocation, but risks from higher bond yields and virus developments need to be monitored closely
  • Government bonds – US Treasury valuations have improved as investors have priced in rising inflation risks. Higher yields also mean they have more scope to offer diversification benefits in our multi-asset portfolios
  • Corporate bonds – Spreads for investment grade bonds remain consistent with an underweight position. Nevertheless, Asian and high-yields bonds continue to look relatively attractive

Source: HSBC Global Asset Management, as at March 2021, and subject to change. The views expressed are those of HSBC Global Asset Management, they were held at the time of preparation, and are subject to change.

Asset Class Performance at a glance

Global equities edged higher in February as investors priced in a brightening economic outlook amid ongoing Covid-19 vaccinations and US fiscal stimulus hopes

  • Government bonds – Longer-dated US Treasuries lost further ground over the month (yields rose) on the back of investor concerns over higher future inflation due to a stronger economic outlook
  • Commodities – Oil prices rose amid rising optimism over the demand recovery and supply disruptions in the US; gold prices fell as higher bond yields raised the opportunity cost of holding the zero-yielding precious metal

Past performance is not an indication of future performance

Note: Asset class performance is represented by different indices

Global Equities: MSCI ACWI Net Total Return USD Index. Global Emerging Market Equities: MSCI Emerging Market Net Total Return USD Index. Corporate Bonds: Bloomberg Barclays Global HY Total Return Index value unhedged. Bloomberg Barclays Global IG Total Return Index unhedged. Government bonds: Bloomberg Barclays Global Aggregate Treasuries Total Return Index. JP Morgan EMBI Global Total Return local currency. Commodities and real estate:  Gold Spot $/OZ/ Other commodities: S&P GSCI Total Return CME. Real Estate: FTSE EPRA/NAREIT Global Index TR USD

Source: Bloomberg, all data above as of close of 28 February 2021 in USD, total return, month-to-date terms

Base case views and implications

US

Monthly macroeconomic update

  • Vaccine rollout and further fiscal stimulus is a major positive for the 2021 outlook
  • Recent data has shown a significant pickup in consumer spending, while housing activity remains very buoyant
  • Inflation is set to pick up markedly in the coming months, mainly due to base effects. However, this is unlikely to translate into sustained inflationary pressure

Base case view and implications

  • We remain constructive on US equities. Significant tech and quality exposure remains a positive, while cyclical parts of the market can potentially benefit from fresh fiscal stimulus
  • Prospective returns for US Treasuries have improved further and remain attractive versus other government bond markets. A dovish Fed limits the risk of significantly higher yields

Europe

Monthly macroeconomic update

  • The near-term outlook remains challenging as the pace of vaccine rollout in the EU remains relatively disappointing. This is in stark contrast to the UK’s rapid progress
  • Positively, the rate of new infections across the region is broadly stable. Overall, given Europe’s economic underperformance last year, activity should rebound strongly in 2021

Base case view and implications

  • A strong cyclical recovery later in 2021 combined with a dovish ECB and relatively generous government income support schemes supports our overweight view on eurozone equities
  • European government bond valuations remain unattractive and diversification properties limited in our view. We prefer US Treasuries

Asia

Monthly macroeconomic update

  • China is expected to remain a cyclical outperformer, with the services sector taking the reins in terms of growth. Nevertheless, the recovery could slow later in 2021 as policy stimulus fades and the global recovery shifts to domestically focussed services sectors
  • India’s economic activity appears to be gradually returning to pre-Covid levels, although a fragile banking sector and relatively weak fiscal policy support are headwinds
  • Japan is well positioned for a strong recovery in 2021 given its favourable access to vaccines, although the pace of rollout has so far been relatively slow

Base case view and implications

  • A rapid rebound in economic activity supports our overweight view on China equities. We are also positive on other North Asia markets given their suppression of the virus and exposure to China
  • India and ASEAN have been laggard markets in 2020 but are set to benefit materially from the widespread distribution of the vaccine
  • Japanese equities are attractively valued but we think there are challenges in unlocking this value potential. We remain neutral

Other EM

Monthly macroeconomic update

  • Brazil was Latin America’s economic outperformer last year, although headwinds this year are considerable amid vaccination challenges and a withdrawal of fiscal support
  • Russia’s economy is less exposed to social distancing measures versus other emerging markets, and benefits from the recent uptick in oil prices
  • Gulf economies should experience a strong recovery this year amid rapid Covid-19 vaccination, combined with higher oil prices and production. However, other parts of MENA are likely to lag amid fiscal constraints and a lack of vaccine access

Base case view and implications

  • The global economic recovery and a dovish Fed support the outlook for EM assets. EM fixed income offers attractive valuations, with scope for gains in EM currencies against the US dollar
  • For EM equities, we think the risk-reward of ASEAN is better than Latam. The bright spot remains North Asia which benefits from exposure to mainland China and defensive characteristics

Source: HSBC Global Asset Management. As at 1 March 2021. The views expressed were held at the time of preparation, and are subject to change

Asset class positioning

Equities

Government Bonds

Corporate Bonds

Alternatives

Asian assets

1 Foreign direct investment. Source: HSBC Global Asset Management. As at 1 March 2021. 2The Regional Comprehensive Economic Partnership. The views expressed were held at the time of preparation, and are subject to change

February 2021

*Indices expressed as total returns. All others are price returns

All total returns quoted in USD terms.

Data sourced from MSCI AC World Total Return Index, MSCI USA Total Return Index, MSCI AC Europe Total Return Index, MSCI AC Asia Pacific ex Japan Total Return Index, MSCI Japan Total Return Index, MSCI Latam Total Return Index and MSCI Emerging Markets Total Return Index.

Total return includes income from dividends and interest as well as appreciation or depreciation in the price of an asset over the given period

Sources: Bloomberg, HSBC Global Asset Management. Data as at close of business 28 February 2021

Past performance is not an indication of future returns

  • Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout February 2021, HSBC Global Asset Management’s long-term expected return forecasts which were generated as at 31 January 2021, our portfolio optimisation process and actual portfolio positions.
  • 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 January 2021. 
  • 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 28 February 2021.


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