Our House Views

01/06/2022

Investment Monthly - June 2022

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

Key Takeaways

Growth is slowing but remains resilient in the US and ASEAN. We don’t expect a global recession this year and remain Neutral on equities. We upgrade HK stocks to Overweight but downgrade European Consumer discretionary and Financials, while upgrading Consumer staples globally to add resilience.
The US Federal Reserve’s May meeting has lowered expectations on more aggressive rate hikes. We see value in short-dated corporate, EM hard currency and quality high-yield bonds. Rising real yields favour value and high dividend stocks.
We downgrade Taiwan equities and Asian Technology due to the headwinds in the smartphone and semiconductor space. A balanced approach which captures the strengths of both value and growth stocks, with a focus on quality, is preferred.

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Read our topics for this month

1. What is the growth outlook for the second half?

US Inflation dropped to 8.3% in April (8.5% in March) but remained elevated in the UK and Eurozone. We think global inflation will gradually ease, albeit remaining high short-term.
High inflation affects profit margins and consumption which weigh on growth. Recent market sell-offs reflect concerns about a hard landing, but we don’t think a global recession is likely as some regions and sectors remain resilient.
The strong labour market and energy-related activity support a rebound in the US in H2. In Asia, ASEAN sees positive consumption and earnings momentum. We upgrade HK stocks to Overweight due to the economic reopening and attractive valuations (Forward P/E at 14.1x). Mainland China’s policy stimulus are likely to revive growth in H2. In view of slowing growth in Europe, we downgrade Consumer discretionary and Financials there, and upgrade Consumer staples (Global, Europe & Asia) to be more defensive.

Source: HSBC Global Research, HSBC Global Private Banking as of 18 May 2022.

2. What does higher real yield mean to investors?

As expected, the Federal Reserve raised policy rates by 0.5% at its May meeting, and will reduce the size of its balance sheet from June onwards to curb inflation.
Expectations on more aggressive interest rate hikes are lower. Following the recent spike in bond yields, we see value in short-dated corporate bonds, particularly in the investment-grade space, as well as EM hard currency bonds and quality high yield.
We believe real yields could continue to rise, which will support value stocks and high dividend stocks for their stable earnings. Rising real yields is a headwind for gold but should keep the US dollar at elevated levels.

Source: Bloomberg, HSBC Global Private Banking as of 11 May 2022. Past performance is not a reliable indicator of future performance.

3. Should we move out of growth stocks?

Growth stocks are characterised by their higher-than-average earnings potential with key drivers such as innovation (e.g. Technology), while value stocks are attractive for their low valuations and dividend payouts (e.g. Healthcare). Investors generally prefer value stocks in a rising rate environment.
Due to the concerns over smartphone demand, logistics and supply chain issues in the semiconductor space, and slower growth in consumer electronics products, we downgrade Taiwan equities and Asia Technology to Neutral. However, it does not mean that we should move out of growth stocks completely. For example, we remain Overweight on Global and US Technology, where we see opportunities in automation and artificial intelligence.
A balanced approach to capturing resilient income from value stocks while not missing out on opportunities in the growth space is preferred. Quality is key for both investment styles.

Source: Refinitiv, HSBC Global Private Banking as of 17 May 2022.
Past performance is not a reliable indicator of future performance.

Think Future 2022 Mid-year Edition

Your guide to the global investment landscape

Four investment themes to help shape your portfolio

Focus on quality and income to weather volatility
Ride on the strength of the U.S. and ASEAN
Drive positivity in times of change
Diversify to navigate through uncertainty

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

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Read our investment themes

1. Focus on quality and income to weather volatility

Fears around inflation and higher interest rates have spiked market volatility. We believe the recovery should continue albeit softened – our 2022 global GDP forecast is 3.4%. Investors should stay invested, with an emphasis on building resilience and diversification in portfolios.

Over the next 6 months, we advocate:

quality and dividend-paying stocks
stocks that benefit from higher rates, rising commodity prices, and those that are more resilient to volatility
short-duration corporate bonds in Developed Markets and Emerging Markets (hard currency)

2. Ride on the strength of the U.S. and ASEAN

Consumer demand in the U.S. is expected to support jobs, income growth and lift corporate earnings. In Asia, ASEAN is expected to have stronger growth (2022 GDP forecast of 5.0%). Travelling north, Hong Kong is also gaining traction from its economic reopening.

Over the next 6 months, we prefer stocks in the U.S., ASEAN (particularly Singapore, Indonesia and Thailand) and Hong Kong.

3. Drive positivity in times of change

The world urgently needs to reduce greenhouse gas emissions to limit global warming to 1.5°C. Carbon-heavy sectors, such as power generation, can benefit from innovative technology. Higher energy costs, tight supply of fossil fuels and record profits of energy companies are driving a greater emphasis on sustainability.

Focus on themes around clean innovation, sustainable infrastructure, and emissions reduction. ESG metrics can help investors form a clearer picture of risks and opportunities, and hence improve risk-adjusted returns.

4. Diversify to navigate through uncertainty

Investors need to build resilience in portfolios to help absorb economic shocks. A balance between value versus growth stocks, cyclical versus defensive sectors can dampen volatility.

A multi-asset approach spread across different asset classes, geographies and sectors is vital in times of uncertainty. Over the next 6 months, we prefer Communications, Consumer Staples, Energy, Financials, Healthcare, Materials and Technology.