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House views

10/08/2020
Coronavirus
Equities
Europe

Macro Outlook

  • With lockdowns being lifted, economic activity is picking up quickly across a range of economies, albeit from 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; a sharp rebound in the near-term followed by a more gradual recovery. 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. The biggest downside risk to this “swoosh” scenario is a policy mistake. “Stimulus fatigue” could set-in over the second half of 2020

Investment views

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

Substantial policy easing and reduced spread of COVID-19 have reduced downside tail risks

Despite the recent rally, we believe the market is pricing in our baseline economic scenario of a “swoosh” recovery. There is no clear sign of “irrational exuberance” in pricing 

Exposure to big tech companies is also beneficial in our view

We upgrade to overweight as we believe 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, prospective risk-adjusted returns are attractive in our view; the ECB has so far been proactive and innovative in its policy approach, and Covid-19 case growth is broadly under control in most countries

The UK equity risk premium (excess return over cash) remains comfortably above that for other developed market (DM) equities

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. COVID-19 case growth remains on an upward trend in a number of Latin American countries 

  • Views are based on regional HSBC Global Asset Management Asset Allocation meetings held throughout July 2020, HSBC Global Asset Management’s long-term expected return forecasts which were generated as at 30 June 2020, 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 30 June 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 July 2020.

 

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

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