Top of main content

Our House Views

14/09/2021

Investment Monthly - September 2021

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

Key Takeaways

  • We remain positive on the stock market and other cyclical investments like high yield bonds but portfolio resilience will be key.
  • Risks including Covid-19 and central bank tightening mean we have a renewed focus on high quality companies in portfolios. We favor large-cap, high quality companies that pay attractive dividends.
  • We still prefer US, UK and Asian equities which should rally further, driven by strong earnings. Short-term, we upgraded European equities to Overweight thanks to strong growth momentum in the region. 

Read our topics for this month

1. Why does ESG matter even more now?

  • The UN's climate change authority (IPCC) has confirmed the climate has changed and attributed by human activity. At the current rate, temperatures will rise by 1.5 degrees (from pre-industrial levels) by 2040. Reaching and surpassing the 1.5-degree threshold means more frequent and severe extreme weather.
  • Adaptation is critical. For example, better flood and fire management measures caused by extreme rainfall or heat. But mitigating the temperature rises is the key. The damage caused by going beyond 1.5 degrees can be managed if we achieve Net Zero emissions by 2050.
  • Financial markets will reward companies better adapted to the sustainability revolution. Broader investor and consumer appeal in sustainable companies may enhance earnings, lower costs of capital and reward them with higher valuation multiples. 

Source: Bloomberg, data as of 24 Aug 2021

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

2. Can stocks push higher and why portfolio resilience?

  • We think stocks can rally further. In addition to our preferences for US, UK and Asia, we have upgraded Europe equities to Overweight due to the region’s strong growth momentum and Europe GDP forecasts from 4.4% to 4.9% for 2021. Sentiment is high and the European Central Bank has emphasised its commitment to stimulate the recovery.
  • There are 2 key risks to our positive outlook. First, market volatility is possible depending on how delicately the Fed handles its messaging around the tapering of quantitative easing. Second, Covid-19 remains a risk to the recovery even though our base case is that vaccine progress allows the recovery to continue.
  • Our focus is on large, high quality companies that are more resilient in the face of volatility. In particular, we like those companies that also pay attractive dividends. This is especially compelling in a low-yield world. 

Source: Refinitiv Datastream, Data as of 25 Aug 2021.

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

3. What is the outlook for Asia?

  • Recent Asian equities weakness has been driven by  new Covid-19 cases. Despite this, we remain positive on Asian investments. Over the next 3-6 months, we remain Overweight Asian equities and see opportunities particularly in Singapore and Taiwan. Both markets benefit from the recovery and favourable supply/demand dynamics in semi-conductors.
  • We believe Chinese equities have a place in portfolios as a structural long-term investment. However, we have a Neutral allocation in the short-term because of ongoing regulatory risks. 
  • On fixed income, investors can gain exposure to more attractive yields through Asian high yield bonds and EM debt, in particular Asia and China credits. 

Source: Refinitiv Datastream, Data as of 26 July 2021.

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.