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Our House Views

01/09/2022

Investment Monthly - September 2022

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

Key Takeaways

  • Although US headline CPI may have peaked, core inflation remains sticky in the US and elsewhere meaning that policy tightening is likely to stay on course. We now expect Europe  to go into a recession in Q4 with more headwinds ahead. Our search for quality and resilient earnings outlook leads us to overweight on US equities and underweight Eurozone equities, and we prefer investment grade bonds with short-to-medium maturities. 
  • The heatwaves in China and Europe have intensified the energy supply issue and the US Inflation Reduction Act presents huge opportunities in the energy space (e.g. clean energy). High oil and gas prices are also positive for Energy which we remain overweight.
  • We upgrade US Consumer Staples on high food prices, and downgrade US Healthcare due to financing pressure on biotech, and Materials on high input costs. Mexico benefits from trading with the US while waning semiconductor demand weighs on Taiwanese equities.

 

Read our topics for this month

1.  Will central banks slow down their rate hikes?

  • Despite a lower US headline CPI in July (i.e. 8.5%), core CPI remained sticky (including rent, food and services). We think it’s too early to price in a more dovish Fed which affirmed at the Jackson Hole Economic Symposium that it will stay on its path. Short-dated bond yields are close to their recent highs while the equity markets will increasingly focus on the earnings outlook. The USD strength is likely to persist.
  • In Europe, inflation reached a new record of 8.9% in July and may hit double digits in Q4. Record-high inflation, the cost of living crisis and the impact of potential rationing of gas and energy support our view that the region (including the UK) will go into a recession in Q4 2022 and early 2023.  Nevertheless, policy tightening will continue to bring inflation in check. We expect a 0.5% hike by the ECB in September to achieve a total of 1% rate rises by the end of the year.
  • We stay focused on quality companies with strong margin power and dividend payouts, particularly in the US which has more quality stocks than Europe. We remain overweight on US equities and underweight on Eurozone equities. For bonds, we prefer investment grade with short to medium maturities.

Source: Bloomberg, HSBC Global Private Banking as at 22 August 2022.
Past performance is not a reliable indicator of future performance.

2.  Does the outlook for Energy remain strong? 

  • The ongoing heat waves in China and Europe have renewed concerns over energy supply. Some areas in China will see power supply limitations but the seasonal tension should subside rather quickly. In Europe, heat and drought are affecting hydroelectric and nuclear generation. Cuts in Russian gas supply will also worsen the energy crisis, keeping energy prices high.
  • Meanwhile, the US Senate has passed the Inflation Reduction Act which aims to double the amount of new, clean electricity-generating capacity by 2024 via massive investments. Clean energy will benefit.
  • High oil and gas prices should also support energy stocks, even with oil prices off their highs. We remain overweight on Energy.

Source: Bloomberg, HSBC Global Private Banking as at 22 August 2022.
Past performance is not a reliable indicator of future performance.

3.What else may benefit or suffer from the current environment?

  • High food prices and strong earnings are key drivers for our upgrade on  US Consumer Staples to overweight. While we keep European Healthcare overweight due to its heavy exposure to relatively resilient pharma stocks, we downgrade US Healthcare to neutral as biotechnology faces financing challenges.
  • High energy costs are a problem for Materials, especially chemicals, which may see margin pressure from high input costs. We downgrade Materials to neutral in most regions. For Asia, we downgrade the sector to underweight due to the slower construction activities related to the depressed property market outlook in mainland China.
  • Geographically, Mexico benefits from the strong trade links with the resilient US market and a structural reorientation of supply chains (e.g.  industrial and consumer goods). We therefore move EM LatAm to overweight. The cross-strait tensions and waning global semiconductor demand warrant our downgrade on Taiwanese stocks to underweight.

Source: Refinitiv Datastream, HSBC Global Private Banking as at 26 August 2022.

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.