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Our House Views

11/10/2021

Investment Monthly - October 2021

The Investment Monthly discusses key issues facing investors and offers the latest HSBC house & sector views.

Key Takeaways

  • The Fed kept policy rates unchanged at its September meeting, but opened the door to tapering which could start as early as November.  
  • We do not view the debt crisis in China’s property sector as a systemic event. An orderly restructuring is more likely but markets may remain volatile short-term.
  • We still like global equities, particularly US, UK, European and Asian equities. Large cap, high-quality, dividend-paying companies are our picks within this.

 

Read our topics for this month

1.What does the latest FOMC meeting mean?

  • The Fed kept its policy rates unchanged at its September FOMC meeting as expected. As we are still in the mid-cycle stage, policy normalisation will be gradual and this should support risky assets. We do not expect US policy rates to hike next year (our forecast is June 2023) but tapering could start in November.
  • Fed’s well-managed communications, along with above-trend growth (5.9% for 2021), falling inflation (projected to halve to 2.2% in 2022) and a low interest rate environment (0-0.25%) are positive for corporates to achieve healthy margins and earnings growth. 
  • We remain overweight global and US equities with a pro-cyclical bias. Consumer-related equities and interest rate sensitive sectors are more likely to outperform. 

Source: Bloomberg, The Federal Reserve, data as of 29 September 2021.

Indices: MSCI AC World Index (USD) and the Fed Funds Rate target.

Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

2.  How to address recent market volatility?

  • In addition to uncertainties around Fed policy and Delta variant, market concerns over the default risk of the China’s property sector and its contagion effects have dominated the recent headlines, and weighed on global sentiment.
  • Regarding concerns over the Chinese property sector, we expect to see an orderly restructuring rather than a systemic crisis in China. However, markets may remain volatile while events pan out. We are positive on Asian equities as a whole.
  • Investors should not panic-sell but focus on portfolio resilience. This can be achieved through diversifying into quality and large-cap equities (e.g. US, UK, Asian and European), and selective high-quality bonds.

Source: Refinitiv Datastream, Bloomberg, Data as of 29 September 2021.

Indices: CSI300 in CNY for Chinese equities and VIX Index for US Implied Volatility, respectively.

Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

3. What is the outlook for Europe?

  • European equities have performed well over the past few months. A number of catalysts have warranted our overweight position.  First, the relatively more dovish positioning of the European Central Bank (ECB) is positive for businesses and asset prices. The ECB’s commitment to stimulate the recovery and continue the bond purchases should support earnings.
  • Second, there are long-term opportunities from the EU’s focus on green infrastructure. We’ve upgraded the region’s utilities sector to Neutral to capture the opportunities in renewable utilities. The upcoming Climate week and COP 26 will further boost the green theme.
  • Finally, the German Election result means a coalition government will be formed, most likely involving the Social Democratic Party (SPD) and Green Party.  Should this happen, we think this could lead to deeper Eurozone integration and a less conservative stance on fiscal spending. These should support European equities.

Source: Refinitiv Datastream, Bloomberg, data as of 29 September 2021.

Indices: S&P500 and EuroStoxx50 for US and European equities, respectively. Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

Think Future - 2021 mid-year edition

Your guide to the global investment landscape for the 2nd half of the year.

Four investment themes to help shape your portfolio

  • Stay invested, but time to be selective
  • Skew portfolios towards service-related sectors
  • Keep riding the long-term sustainability wave
  • Review your portfolio to ensure diversification

 

Read our full report to access more on these themes, key data to watch and regional views across the world.

 

Read our topics for this month

1. Stay invested, but time to be selective

We’re still positive on equities, but stress the need to be meticulous in positioning your portfolio. Why? Markets have already done well this year and with valuations now higher, there is arguably less margin for error. Bear in mind that volatility could arise in certain pockets of the economy, due to ongoing concerns about inflation and the pandemic. 

 

Looking ahead however, corporate earnings are expected to remain strong. We like equities in the US, where fiscal stimulus is a powerful driver, and in the UK thanks to its attractive valuations. We also favour stocks in Mainland China, where high growth catalysts dominate, and Singapore for its strong exposure to global manufacturing andthe recovery.

 

Over the next 3 months, we are Overweight on equities in the US, UK, Mainland China and Singapore. Covid-19 remains a risk but we expect the services sector to drive the next phase of the rally in these economies.

2. Skew portfolios towards service-related sectors

Right now, our preference is for cyclical sectors, particularly those in the consumer discretionary space. The sector has underperformed but stands to benefit from businesses reopening in services and hospitality over the coming months. The key factor in its favour? Household savings have been accumulating and consumers are expected to deploy this in a wave of pent-up consumption.

 

We also remain positive on the materialsindustrials and financials sectors. Materials and industrials companies can still benefit even if they are now more expensively valued. Financials offer another way to lean into the recovery and can also act as a useful inflation hedge.

 

Looking elsewhere, we believe that technology is a structural success story with enormous long-term potential. However, higher bond yields mean that the sector may face short-term headwinds. It now makes sense to focus on specific areas, particularly in Asia, where tech and the consumer intersect. E-commerce is a good example. The reasons are simple: the rise of the middle class and a tech-savvy generation of consumers will play a key part in ongoing recovery.

 

Cyclical sectors remain the place to be and our preference is for the consumer discretionary sector over the coming months.

3. Keep riding the long-term sustainability wave

With more than 110 countries already pledged to achieve carbon neutrality by 2050, sustainability has taken centre stage globally. The US, Europe and Mainland China have also committed to investing significantly in the transition to low carbon, thereby encouraging new innovation and growth in areas exposed to infrastructure, transport and beyond. We expect lots of “green” investment opportunities to arise over the coming years.

 

Embedding EnvironmentalSocial and Governance (ESG) metrics into your portfolio is an effective way to manage risk, enhance the potential for resilience and tap into green innovation to generate long-term capital growth. Companies with strong ESG practices are able to offer investors greater transparency, while those that fall short in this area risk falling foul of future regulation. As things stand, sustainability is becoming embedded among governments, companies and investors, with the aim of building a better future through positive change.

 

We advocate exploring ESG opportunities in “green” sectors like clean energy, green infrastructure, transportation, buildings, industrials and broadbandtechnology.

4. Review your portfolio to ensure diversification

After a long period of lockdown followed by the market rally, investors may be sitting on large amounts of cash or enjoying significant recent gains. Either way, a timely mid-yearreview should now be a priority to ensure your portfolio is appropriately diversified and positioned.

 

What’s the best way to do this? Cash offers poor returns and erodes your purchasing power over time, while bond yields, despite rising slightly as of late, are still at record lows globally. More than ever, a multi-asset approach that has appropriate allocations to high quality bonds alongside riskier asset classes is the best way to approach investing.

 

Adopting a multi-asset approach that is spread across different asset classes, geographies and sectors is the best way to invest at the current time.