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Our House Views

02/08/2022

Investment Monthly - August 2022

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

Key Takeaways

  • Earnings forecasts are being cut but the positive is that analysts are getting more realistic. As for interest rates, hopes that inflation will peak sooner mean that the Federal Reserve may hike less than markets feared a few months ago. So we remain invested but focus on quality, income and defensive sectors as markets remain volatile. 
  • Despite yield inversion and a fall of 0.9% GDP growth for Q2, the strong US labour market should keep the economy from slowing sharply. Europe is faced with rising inflation, natural gas disruption risks and prolonged geopolitical tensions. We maintain a defensive sector stance globally and have further downgraded European Financials and Real Estate while upgrading Communication Services. 
  • Hong Kong equities remain our top pick in Asia. Singapore is no longer cheap, so we take profits and move to neutral. China is still struggling with macro headwinds but valuations and some longer-term themes with government support remain attractive.

 

Read our topics for this month

1.  What is the earnings outlook for Q2?

  • Markets are repricing margins and the growth outlook impacted by inflation and rising rates. Expectations on earnings are more realistic (e.g. 4.3% for the US in Q2), but we expect further downgrades on margin pressure, the impact of FX moves and less ambitious investment plans. That said, the energy, materials and food sectors should remain strong.
  • Slowing growth has led to lower demand, falling commodity prices, and a shift in consumption towards cheaper options, which may help to ease inflation in the coming months.
  • It is therefore hoped that policy rates may peak earlier than expected but near-term volatility remains. Investors should focus on quality and income. Less pressure on bond yields may favour growth stocks but the outlook remains challenging, so a balance between value and growth is preferred. For bonds, we prefer short-dated investment grade over high yield.

Source: Bloomberg, HSBC Global Private Banking as at 29 July 2022

2.  Are US and Europe heading into recession?

  • Despite a sharp inversion of the 2-10year US Treasury yield lately and a fall of 0.9% GDP growth for Q2, we think the US will avoid a sharp slowdown due to a strong labour market. We overweight US equities due to many companies’ strong market positions but maintain a defensive sector stance, a focus on quality and a selective approach amid the growth slowdown.
  • In Europe, economic growth is likely heading towards stagnation on higher food and energy prices pushing inflation up (8.6% in June), leading to a surprise rate hike of 0.5% by the ECB in at its July meeting. The natural gas disruptions and prolonged geopolitical tensions are  downside risks. We remain underweight on Eurozone equities.
  • We have turned even more defensive by downgrading the region’s Financials and Real Estate to underweight on growth concerns, while upgrading Communication Services to overweight on attractive dividends and M&A opportunities.

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

3.    What are the opportunities and challenges in Asia?

  • The global economic slowdown has started to affect inventory levels and companies’ order books. Asia is no exception and we’ve become more selective. We remain overweight on Asian and Hong Kong stocks on economic reopening and resilient growth. Taiwan and South Korea see lower demand for technology products globally.
  • Valuations of Singapore and Indonesia are no longer cheap. Singapore is challenged by high wages and high exposure to the financial sector which is dragged by slower growth and flatter yield curves. We take profits and move to neutral. Thailand looks more attractive within ASEAN.
  • China’s recent credit issues in the property sector, worsening global demand outlook and weak consumer sentiment warrant our neutral stance on Chinese equities. Yet, their valuations and some longer-term themes supported by government policies (e.g. infrastructure and green opportunities) remain attractive. 

Source: Bloomberg, HSBC Global Private Banking as at 12 July 2022. MXCN – MSCI China Index. 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.

 

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.