Top of main content

Our House Views

06/01/2022

Investment Monthly - January 2022

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

Key Takeaways

  • Policy normalisation is a sign of central banks’ confidence in the economy. Historically, stock markets have done well at the start of and during previous tightening cycles. 
  • Global growth should continue albeit at a slower pace in 2022. Asia remains our top geographic pick due to its favourable demographics and opportunities in the north and southeast regions.
  • Rising Omicron cases, high inflation and supply chain issues are key risks. Review your portfolio with a focus on large, high-quality companies. Explore long-term structural opportunities, such as green investing and digitalisation.

 

Read our topics for this month

1. Can stocks rise further if rates go up?

  • Central banks have started a gradual normalisation process. The Federal Reserve will end its QE program in March thanks to a positive outlook and we now expect three 0.25% rate hikes in 2022. The Bank of England also raised its policy rate to 0.25% in December.
  • Our analysis of the six previous Fed tightening cycles show that the US equity market delivered an average return of 7.4% during the six months before tightening and 12.7% p.a. during the actual tightening process.
  • We expect stock market returns to stay positive thanks to a resilient economy and corporate profitability. Policy normalisation is a signal that the economy is strong enough to withstand higher interest rates. 

Source: Bloomberg, HSBC Private Banking as of 12/15/2021. Past performance is not a reliable indicator of future performance.

2. Will global growth be positive in 2022?

  • We expect global recovery to continue but growth will moderate this year (GDP forecast of 4.1% compared to 5.7% in 2021).
  • Equity returns will remain positive supported by solid earnings growth but pace will be slower. Interest rates, while likely to rise, are expected to stay low to sustain the economy. This favours equities and we prefer US, European and Asian equities.
  • Asia remains our top geographic pick because of its favourable demographics and opportunities in the north and southeast regions (e.g. Singapore, Malaysia and Indonesia). There is also room for a resurgence in consumption among its middle-income consumers. 

Source: HSBC Global Research, as of 5 January 2022. GDP aggregates use chain nominal GDP (USD) weights and inflation aggregates calculated using GDP PPP (USD) weights. 

3. How should investors structure their portfolio?

  • The new Omicron variant may keep markets volatile. Further, inflation concerns, supply chain disruption and upcoming elections all add uncertainty to the investment landscape.
  • Stay invested in equities but focus on large, high-quality companies that pay attractive dividends. Invest selectively in areas which benefit from long-term structural growth, such as sustainable investing and digitalisation. For the next 3 months, we also favour consumer discretionary and financials over industrials and materials sectors. For bonds, Global High Yield and Emerging Markets (USD) are our preferences.
  • It’s a good time to review your portfolio at the start of the year to ensure it remains diversified and resilient while capturing the growth opportunities.

Source: Refinitiv Datastream, as at 21 December 2021. Rebased to 100.

Note: Asset class performance is represented by different indices – Global Equities: MSCI World (USD); Global ESG stocks: MSCI ESG World Leaders (USD).

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.