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Our House Views

03/11/2021

Investment Monthly - November 2021

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

Key Takeaways

  • We remain positive on risky assets like global and US equities. However, we expect markets to be volatile amidst inflation and supply chain risks.
  • We downgrade UK equities to neutral. The UK is suffering from supply chain issues while rising Covid cases and monetary tightening may be headwinds.
  • To manage portfolio risk, we downgrade Emerging Market Local Currency Bonds because of their higher volatility within the fixed income universe. Also, they may underperform should the US Dollar strengthen. 

 

Read our topics for this month

1.What do we think about markets right now?

  • We remain positive on Global and US equities even if there are concerns about higher inflation and supply chain challenges. While volatility may persist, corporate earnings should remain robust and support stocks. We prefer the financials and consumer discretionary sectors.
  • We downgrade UK equities to neutral. UK equities have performed well, supported by a weaker Pound Sterling. However, the UK has been hit hard by supply chain issues while rising Covid cases and monetary tightening will become a headwind. The recent UK budget includes some measures for lower income households but higher cost of living remains a challenge.
  • We also downgrade Emerging Market local currency bonds to neutral in order to reduce portfolio risk. EM local currency bonds tend to be the most volatile fixed income asset class due to its currency component. It may also underperform should the US Dollar strengthen. 

Source: Bloomberg, HSBC Global Private Banking, data as of 17 October 2021. Investment involves risks. Past performance is not an indication for future performance. For illustrative purpose only.

2.  Do we still think inflation is transitory?

  • Yes, we expect inflation to be transitory but risks are now higher, and inflation will only fall in Q2 2022.  We think energy prices may remain high short-term even if there may be limited further upside. Supply chain challenges have also proven more difficult to address and may take time to resolve.
  • Central banks should continue to see inflation as transitory and keep policy rates low. However, markets have started to factor in higher inflation expectations, pushing bond yields higher. This could cause market volatility.
  • The surge in fossil fuel prices is likely to accelerate central banks’ commitment to climate change initiatives. COP 26 underpins the urgency to transition to net zero. Copper, steel and cement prices have reached new highs as these are all energy intensive construction materials. 

Source: Refinitiv Datastream, Bloomberg, Data as of 21 October 2021.

Indices: US inflation CPI Urban Consumers (YoY) and Brent Oil (generic 1st crude oil).

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

3. Are we worried about volatility and stagflation?

  • Markets could remain volatile if inflation and supply chain concerns continue into 2022. It is normal for equity returns to slow and volatility to pick up in mid cycle but we tighten the investment opportunity set and focus on active selection, quality companies and portfolio resilience.
  • We are not overly concerned with stagflation because inflation should tame and the labour shortages should eventually ease, even if this may take more time than previously believed.
  • Our downgrades of UK equities and Emerging Market local currency bonds are driven by a desire to manage overall portfolio risk. We remain positive on risky assets overall. 

Source: Bloomberg, HSBC Global Private Banking, data as of 17 October 2021. Investment involves risks. Past performance is not an indication for future performance. 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.