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Our House Views

01/11/2022

Investment Monthly - November 2022

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

Key Takeaways

  • Stagflation fears and rate hikes have led to rising cash and bond yields but cheaper stocks. While stocks are more vulnerable to the slowing economy, bonds appear more attractive from a risk/ return perspective. We prefer short-dated investment grade and EM hard currency corporate bonds for diversification.
  • Despite our underweight on equities, we continue to favour the US over Europe due to its many quality companies to choose. We downgrade South Korean equities on the slowing technology and semi-conductor cycle, and prefer Hong Kong, Thailand and Indonesia on their economic reopening and undemanding valuations. Selection is key.
  • As the new UK’s Prime Minister, Rishi Sunak is expected to take a more prudent fiscal path. Yet, tight financial conditions and high inflation remain downside risks to UK equities and warrant our recent downgrade to underweight. While gilts look attractive, they remain volatile and shorter-dated investment grade bonds are preferred

 

Read our topics for this month

1.  Which asset class is better positioned amid recession risks?

  • The stagflation fears and rate hikes have led to rising cash and bond yields, but the fall in equities have made them much cheaper. However, market concerns will increasingly turn to the slowing economy and equities are vulnerable to this. Earnings growth is expected to be lower in the coming months.
  • Equities and bonds were impacted by the interest rate outlook in the same direction, but equities often perform more poorly if recession fears take over. Cash has become more attractive but its return remains relatively low and its value will be eroded by inflation over time. Sitting on cash is not a good strategy for long-term investors.
  • From a risk/return perspective, bonds appear more attractive than stocks and the bond markets have already priced in a rate path which is in line with the Fed’s guidance for 2023. We prefer short-dated investment grade and EM hard currency corporate bonds for diversification.

Source: Bloomberg, HSBC Global Private Banking as at 27 September 2022. Past performance is not a reliable indicator of future performance.

2.  What should investors do with their equity holdings?

  • The tightening financial conditions in many developed markets are weighing on their housing markets, consumption and investment spending. These warrant a smaller than normal allocation to equities and selection on quality companies is key. Energy is poised to be the winner in Q3 and we are more positive on renewable energy.
  • We continue to prefer the US over Europe due to its many quality companies with strong market positions and low leverage. The mid-term elections may provide an important data point in equity markets as investors recalibrate potential returns in the new political environment. From 1942 to 2018, US equity markets have risen by nearly 15% in the first six months following the election.
  • In Asia, we downgrade South Korean equities to underweight on the slowing technology and semi-conductor cycle. We prefer Hong Kong,  Thailand and Indonesia on their economic reopening and undemanding valuations. We see solid cyclical momentum in Indonesia.

Source: Bloomberg, HSBC Global Private Banking as at 16 October 2022. Past performance is not a reliable indicator of future performance.

3.What is the outlook for the UK markets?

  • Following Liz Truss’s just 45 days in office, Rishi Sunak is elected as the new Prime Minister who is expected to take a more prudent fiscal path.
  • Although market volatility may ease temporarily with gilt yields having fallen, the tight financial conditions and high inflation, which hit 10.1% in September, remain headwinds. The Bank of England is likely to take a more hawkish approach to tightening.
  • UK equities have cheapened on a gloomy growth outlook, persistently high inflation and policy tightening, leading to our recent downgrade to underweight. We will look for much cheaper valuations or improved financial conditions to turn more positive. As the economy tips towards a likely recession, we expect more defensive sectors to outperform (e.g. Healthcare). While gilts look more attractive, they may remain volatile, especially if quantitative tightening will start in November. We prefer shorter-dated European investment grade bonds

Source: Bloomberg, HSBC Global Private Banking as at 20 October 2022. Past performance is not a reliable of future performance.

Think Future 2023

Your guide to the global investment landscape

Four investment themes to help shape your portfolio

  • Take shelter in quality bonds
  • Look for regional advantages in the US and Asia
  • Build resilience with defensive sectors
  • Catch the ESG momentum

 

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. Take shelter in quality bonds

Although we see some signs of inflation and interest rates peaking in 2023, they’re likely to stay high for a while yet, driving market volatility. Since bond yields have spiked significantly, bonds look more attractive than cash and equities from a risk-return perspective.

  • Short-dated investment-grade bonds in developed markets, emerging markets and Asia offer attractive risk-adjusted returns and diversification benefits
  • Floating-rate instruments (e.g. securitised credit) are also favoured

2. Look for regional advantages in the US and Asia

Although the macro outlook isn’t positive for equities, the US and Asia continue to benefit from economic reopening, while offering different growth dynamics. Nonetheless, a focus on quality and relative advantages is critical. 

  • Geographically, the US, Latin America, mainland China and Hong Kong remain our top picks. We focus on quality companies with robust balance sheets, low debt and high profit margins
  • We also favour Southeast Asia, in particular Thailand and Indonesia on their economic reopening and undemanding valuations

3. Build resilience with defensive sectors

With cyclical risks set to remain high, we continue to favour defensive sectors which are less sensitive to economic downturns. 

  • We prefer energy and consumer staples (Global, the US, Europe and Asia), healthcare in Europe and utilities in the US
  • We explore selective opportunities in the real estate sector and favour infrastructure in general

4. Catch the ESG momentum

Many measures and higher climate financing was duly reinforced at the 27th Conference of the Parties. As government policy, technological innovation and capital expenditure increasingly align with ESG goals, we see growing momentum in clean energy and sourcing income from sustainable companies in particular. 

  • Focus on renewable power (such as solar, wind, hydro and waste-to-energy), energy efficiency strategies, green infrastructure, and energy-efficient construction materials
  • Look for regular income from quality companies with sustainability as their core value