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Our House Views

04/05/2022

Investment Monthly - May 2022

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

Key Takeaways

  • Geopolitical tensions, Covid lockdowns in China and rising wages continue to push inflation higher. Even though it may have peaked, persistent supply chain disruptions will support inflation to stay high into 2023. Energy and Materials stand to benefit.
  • We still think a recession in 2022 is unlikely. We prefer short-dated corporate bonds, value and dividend stocks, and upgrade Healthcare stocks for their resilient properties.
  • Regionally, US and Asia remain our top picks thanks to healthy earnings outlook. ASEAN is particularly attractive with strong consumer demand while Europe is challenged by high inflation, slower growth and negative macro implications from the Ukraine conflict due to the energy supply disruptions.

 

Read our topics for this month

1.  What is driving inflation to go higher?

  • The geopolitical tensions in Ukraine, Covid lockdowns in China, rising wages and economic reopening pushing services prices up in some markets continue to drive inflation higher (e.g. 8.5% in the US and 7.4% in Eurozone in March). Will it go further up?
  • The decline of the daily retail gasoline prices since mid-March provides favourable base effects. Some economists expect inflation to gradually fall from the current levels. Even so, supply chain disruptions are likely to linger and inflation will stay high into 2023.
  • The global rise in commodity prices continues to benefit Energy and Materials stocks, and commodity-linked currencies. We maintain our preference for quality companies with strong competitive position and margin power to pass on higher input costs. 

Source: HSBC Global Research forecasts, HSBC Global Private Banking as at 22 April 2022.

2.  What are the implications of the yield curve move?

  • With more aggressive rate hikes already priced in than we expect, we think the scope for further upside is limited. Short-dated corporate bonds in DM and EM hard currency markets are more attractive. The inversion of the 2-to-10 year Treasury yield curve lasted for 3 days only, reinforcing our view that it is too early to call for a recession. Labour market remains strong.
  • We balance value versus growth stocks as the former is  well supported by higher real yields. We also like dividend stocks in search for income. To build portfolio resilience, we upgrade Healthcare (Global & Europe) to Overweight and downgrade Industrials to Underweight in Europe. Financials is a beneficiary of rising rates across the regions.
  • Despite higher real yields, gold is favoured as a diversifier to hedge inflation and geopolitical risks. But unless real yields comes down, we see limited upside, so we remain Neutral.

Source: Bloomberg, HSBC Global Private Banking as at 28 April 2022.

3. Which regions are more resilient?

  • US and Asia remain our top pick thanks to the healthy earnings outlook. US economic activity slowed in Q1 due to rising Covid cases but consumer demand and the labour markets remain strong. M&A and economic activity is expected to rebound in 2H. 
  • Asia is attractively priced with Australia, Malaysia and Indonesia benefitting from the rise in commodity prices and demand for raw materials, while other ASEAN markets see strong consumer demand. China’s 4.8% Q1 GDP growth, attractive valuations and policy easing measures are positive but the zero-Covid policy and related lockdowns weigh on growth. We remain Neutral for now.
  • Despite the policy continuity expected with Macron’s re-election as French president, the European investment outlook remains challenged by high inflation and low growth, and is more vulnerable to the energy supply disruptions. We expect Europe’s GDP growth to be 2.6% for 2022.

Source: Bloomberg, HSBC Global Private Banking as of 18 April 2022. Past performance is not a reliable indicator of future performance.

Think Future 2022

Your guide to the global investment landscape

Four investment themes to help shape your portfolio

  • Stay invested, but manage risks carefully
  • Explore bright spots in Asia
  • Invest into a greener future
  • Dive into digital transformation

 

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

 

Read our investment themes

1. Stay invested, but manage risks carefully

The global economy is at the “mid-cycle” stage, with growth expected to continue at a more moderate pace. Persistent inflation concerns, high raw materials prices and supply chain disruptions are challenges. Our global GDP forecast for 2022 is 4.0%, compared to 5.7% in 2021.

 

Our base expectation is that central banks will keep interest rates low – although with inflation currently on the higher side, there’s increased pressure to raise them. While we expect inflation to subside in 2022, it could contribute to bouts of volatility, especially if combined with new waves and variants of Covid-19, as well as some imminent, geopolitically significant elections.

 

We therefore advocate a diversified, risk-managed portfolio focused on high-quality, large cap companies with generous dividend yields. The inclusion of high-quality bonds and ESG metrics can also enhance resilience.

 

Over the next 3-6 months, we’re Overweight on US, European and Asian equities, but Neutral on UK equities due to supply chain issues and upgraded inflation forecasts

2. Explore bright spots in Asia

Asia’s future is being reshaped by a new generation of tech and consumer leaders, coupled with structural factors that support growth. We like a broad range of sectors in the region, including consumer discretionary, technology, communications and financials. Asia’s savvy middle-income consumers also lagged in spending compared to those in the US and Europe, suggesting room for a resurgence in consumption in 2022.

 

We also see investments being tied to government actions. China’s 14th Five-Year Plan sets a blueprint for high quality, sustainable growth, heralding opportunities in multiple sectors from renewable energy to electric vehicles, as well as innovative technology. Taiwan and Singapore are also home to high-quality companies that benefit from government support, in areas like smart manufacturing, semiconductor chips, 5G, health technology and more. Indonesia’s raw materials industry also stands to benefit from the growing green industry – for example, through nickel for electric car batteries.

 

Over the next 3-6 months, we like these sectors within Asia:

  • Consumer discretionary – a key driver of the recovery
  • Communications – as businesses continue to digitise
  • Technology – as the “new normal” generates further demand
  • Financials – as the industry continues to benefit from an improved economic outlook

3. Invest into a greener future

The UN Climate Change Summit (COP26) tackled vital issues from deforestation to the phasing out of fossil fuels, while securing updated pledges from governments. Progress was also made on mitigation and adaptation strategies, sustainability disclosure standards and financing for developing countries. Although more is needed to put us on the path to 1.5°C, COP26 has turned environmental, social and governance factors into top priorities for governments, companies and investors.

 

The path to net zero relies on green innovation to generate long-term capital growth. Sectors like power generation, infrastructure, transport, construction, electric vehicles and industrials are likely to transform radically as decarbonisation accelerates.

 

Incorporating ESG metrics into your strategy can help to manage downside risks. Companies with robust ESG practices also tend to be more transparent, and maintain shareholder value more effectively.

 

Focus on investment themes around clean energy, sustainable infrastructure, electrical transportation, buildings efficiency and emissions reduction for industrials.

4. Dive into digital transformation

The pandemic has unlocked and reinforced the structural adoption of tech globally, creating investment opportunities in both developed and emerging economies.

 

Technology continues to be a structural winner as the world adjusts to a more convenient, digitally-empowered way of living that enables society to move forward even in uncertain times. Meanwhile, a flood of innovation in sectors like healthcare, online education, communications, e-commerce, entertainment and cybersecurity has opened up more possibilities for humanity.

 

Explore opportunities that will foster digital transformation in the long run, such as cloud technology, automation, 5G, healthcare and smart mobility.