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Our House Views

08/01/2024

Investment Monthly - January 2024

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

Key Takeaways

  • In view of falling inflation and growth deceleration, we now expect the first rate cut to start earlier in June 2024 for the US and Europe and in August for the UK. This should support asset valuations but lower cash returns. It’s therefore sensible to put cash to work in quality assets. We prefer US and Asia ex-Japan stocks, and major DM government bonds (7-10 years) and IG credit (5-7 years).
  • China’s Politburo meeting indicated a pro-growth stance with a strategic focus on technology and innovation, industrial upgrading and green transformation. We expect to see proactive fiscal and monetary measures that will deliver solid GDP growth of 4.9% in 2024. While remaining neutral on Chinese equities, we see select opportunities in the consumption, internet and EV sectors.
  • Although 2024 is expected to be a complex year for investors, we have identified four investment themes to capture opportunities while managing market uncertainties: 1) Optimise bond returns with quality and duration; 2) Focus on large-cap stocks with attractive earnings potential; 3) Exploit opportunities from a broad range of sectors; and 4) Integrate sustainability to capture green potential. Please refer to our “Think Future 2024” for more information.

 

Read our topics for this month

1.  When will developed markets start cutting rates?

  • Central banks of developed markets (DM) continued to hold policy rates unchanged in December, reaffirming our view that peak policy rates have been achieved.
  • In view of further disinflation and growth deceleration, we think rate cuts will occur in 2024. However, as the Fed is now forecasting the average Fed funds rate at 3.6% in 2025, which implies an almost 2%  rate cut over the next two years, we now expect the first cut in June 2024 (vs Q3 previously) with rates falling 0.75% this year. In Europe, the lower inflation backdrop has led us to also move forward the rate-cutting cycle to June. As for the UK, wage growth continues to fall but inflation is slightly stickier, so we foresee the first rate cut in Q3 2024. These cuts will weigh on cash returns.
  • It therefore makes sense to put cash to work in quality stocks and bonds, as they are better positioned to withstand weaker global growth and higher capital costs. We favour US and Asia ex-Japan equities with a preference for large caps, as well as major DM government bonds (7-10 years) and investment grade credit (5-7 years).

Source: Bloomberg, HSBC Global Private Banking as at 20 December 2023. Forecasts are subject to change.

2.  What did China’s Politburo meeting indicate?

  • In the December Politburo meeting, the Chinese government exhibited  its pro-growth stance with a more optimistic tone than in its July meeting, pushing for a stronger strategic focus on technology and innovation, industrial upgrading and green transformation.
  • On the fiscal side, while a “big bang” stimulus package is unlikely, we expect to see ongoing bond issuance and deployment of funds for infrastructure development and maintenance, raising the official  deficit to 4% of GDP in the coming years, up from 2023’s 3.8%. On the monetary side, liquidity injections will be added via the medium-term lending facility (MLF), reserve requirement ratio (RRR) cuts and Pledged Supplementary Lending. The Central Economic Work Conference also pledged to provide more support for private and state-owned enterprises as well as other proactive measures (e.g., direct funding support to increase affordable housing supply) to address  property market issues.      
  • We expect China to deliver solid GDP growth of around 4.9% in 2024. As property market stress remains a key challenge, we stay neutral on both mainland Chinese and Hong Kong equities but see select investment opportunities in the consumption, internet and EV sectors.  

Source: WIND, HSBC Global Private Banking and HSBC Global Research, as at 19 December 2023. Past performance is not a reliable indicator of future performance.

3.  What is the outlook for 2024?

  • Although the rate hike challenges in major economies are finally fading away and the likelihood of a US soft landing mitigates the risk of a global recession, slower global growth and lingering geopolitical risks, including a busy election calendar, mean that 2024 will be a complex year for investors.
  • Yet, we remain positive and expect to see a mild acceleration in global growth in the second half of 2024, thanks to falling inflation which should boost consumption, while rate cuts will be positive for asset valuations and corporate earnings. We also see long-term structural trends turning into attractive investment opportunities.
  • We have identified four investment themes where we see the best opportunities while managing volatility in 2024: 1) Optimise bond returns with quality and duration; 2) Focus on large-cap stocks with attractive earnings potential; 3) Exploit opportunities from a broad range of sectors; and 4) Integrate sustainability to capture green potential. The start of the year is always a good time to review your portfolio. For more information on how these themes can fit into your portfolio, please refer to our “Think Future 2024” publication and video.

Source: HSBC Global Research as at 5 January 2024. Estimates and forecasts are subject to change. India inflation forecasts are fiscal year.

Think Future 2024

Your guide to the global investment landscape

Four investment themes to help shape your portfolio

  • Optimise bond returns with quality and duration
  • Focus on large-cap stocks with attractive earnings potential
  • Exploit opportunities from a broad range of sectors
  • Integrate sustainability to capture green potential

 

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

 

Review the core themes behind our investment outlook

1. Optimise bond returns with quality and duration

We believe central bank pauses will lead to a rate plateau, with the US Federal Reserve likely to start cutting in Q3 2024 and the European Central Bank and the Bank of England following later. Amid a high-for-longer rate environment and slow growth in developed markets, we favour investment grade bonds as they’re better able to navigate tight financial conditions and heightened geopolitical risks, and also extended our duration positioning across developed market government bonds to medium-to-long in order to lock in attractive yields before they come down. ​

  • We look to longer maturities of up to 7-10 years in US Treasuries and UK gilts. For corporate bonds, we maintain our preference for investment grade credit and maturities of 5-7 years. ​
  • We favour Indian local currency bonds for yield enhancement and diversification.

2. Focus on large-cap stocks with attractive earnings potential

The US economy is more resilient than most other markets, and that should remain the case in 2024 thanks to cooling inflation and the end of rate hikes. These trends support equity valuations and improve companies’ profit margins. Fundamentally, we remain bullish on Asia, but the divergence in growth has led us to favour India and Indonesia above all. Both enjoy a positive structural growth outlook, favourable demographics and strong domestic consumption. South Korea should perform well as the global tech cycle improves. Overall, we prefer quality large-cap companies with strong balance sheets and low debt levels.

  • We continue to prefer US over European stocks and overweight Asia ex Japan equities, particularly India, Indonesia and South Korea.
  • In Latin America, Mexico is benefitting from US re-onshoring activities, while Brazil offers attractive equity valuations. 

3. Exploit opportunities from a broad range of sectors

Structural shifts in the US are turning into long-term opportunities. The technology revolution and AI-related developments should help create new business models, boost productivity and increase the return on invested capital. We believe a tilt towards cyclical sectors mixed with value exposure will help investors capture diverse sources of growth while mitigating short-term volatility. ​ Elsewhere, we are more defensive in Europe and see opportunities in healthcare, driven by a boost in sentiment and sales expectations around new pharmaceutical products. Asia also offers pockets of secular growth because of its huge population and leadership position in e-commerce and semiconductor manufacturing. ​

  • We like technology and energy in all regions, and favour consumer discretionary, financials, industrials and healthcare (US and global). ​
  • We favour both consumer discretionary and staples, as well as communications services in Asia, and healthcare in Europe. ​

4. Integrate sustainability to capture green potential

Momentum is building towards a sustainable future, driven by green technology, rising global investment in and demand for sustainable solutions, and continued improvement in ESG governance. Renewable energy remains an area of huge attention both socially and commercially, while biodiversity investment is also gaining prominence. In areas where governments fail to deliver on these objectives, we think companies, consumers, cities and investors can provide a powerful impetus for progress. Integrating sustainability in investment processes is becoming a global trend in the finance industry. Companies and sectors that can take advantage of the ESG developments will be potential long-term winners. 

  • Renewable energy sectors, including wind, solar and biofuels, continues to gain investment traction. ​
  • Investing in biodiversity presents cross-sector opportunities and is supported by technological innovation.