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Our House Views

10/01/2023

Investment Monthly - January 2023

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

Key Takeaways

  • Major central banks raised rates by 0.5% in December as expected. We maintain our view that the Fed will make a final 0.5% hike in February 2023 and only cut policy rates by 0.25% in each of Q2 and Q3 2024. We remain overweight on US equities due to the solid labour market and healthy balance sheets, while underweighting Eurozone and UK equities to mitigate recession and inflation risks.
  • Despite slowing growth, we see silver linings on easing inflation and peaking interest rates which are favourable for bonds, pushing bond yields to historically high levels. We prefer investment grade bonds of up to 5 years to manage growth and interest rate risks. We remain defensive in stocks and look for regional advantages in the US and Asia. 
  • While Chinese growth will remain challenged in Q1, a recovery from Q2 2023 is more likely as immunity builds up, and normalisation of consumption, production and pro-growth policies provide positive effects. The relaxation of its zero-COVID restrictions and the funding support for the property market warrant our overweight on Chinese equities. 

 

Read our topics for this month

1.  Is the hiking cycle going to end soon?

  • The Fed raised funds rate by 0.5% in December as expected. While the pace of rate hikes may slow on easing inflation, the Fed indicated clearly that tightening is not over as inflation will be stickier than previously thought. We expect a final 0.5% hike in February before  the first 0.25% cut in Q2 2024, followed by another 0.25% in Q3 2024.
  • The European Central Bank (ECB) and Bank of England (BoE) also hiked rates by 50bps, yet guidance was divergent. We think the BoE will peak policy rate at 3.75% with a 0.25% hike in February, while the market is pricing in a higher deposit rate to over 3% in Europe (currently at 2%) with a hawkish ECB tone, which aligns with our view. 
  • Despite slowing growth, we remain overweight on US equities due to the solid labour market and healthy household and corporate balance sheets. Earnings outlook is expected to improve from the H2 of 2023.  We stay underweight on Eurozone and UK equities to mitigate recession and inflation risks. 

 Source: Federal Reserve, Bloomberg, HSBC as at 30 December 2022.

2.  Is it time to take more risk?

  • While we see silver linings on the back of easing inflation and peaking interest rates, as well as China’s decisive policy pivot towards growth stabilisation, there is still uncertainty around geopolitics and the exact timelines of when the rate, inflation and growth cycles will turn.
  • Peaking US rates and easing inflation should create a more favourable environment for bonds, with bond yields having spiked significantly. Expectations on future rate cuts will also benefit bond prices. We prefer investment-grade bonds to manage earnings slowdown, while short-to-medium duration (up to 5 years) can navigate interest rate volatility.
  • As the economic growth cycle lags the interest rate cycle, we believe it’s too early to add cyclical risk through equities. We remain defensive in our sector strategy and look for regional advantages in the US and Asia, including Hong Kong, mainland China, Thailand and Indonesia. Economic re-opening is a key growth driver, while Southeast Asia also benefits from supply chain reorientation and China’s re-opening.

Source: HSBC Global Private Banking as at 30 December 2022. Past performance is not a reliable indicator of future performance. 

3.Should we expect a quick rebound in mainland China?

  • The additional COVID relaxation measures introduced recently
    (e.g. negative nucleic acid results for cross-regional travellers and temporary lockdowns discontinued) have materially lifted market confidence. The government has also ramped up funding support for the property sector through increased credit supply, policy support for new bond issuance and equity financing for privately-owned developers.
  • However, we don’t expect a quick rebound in growth. A strong recovery from Q2 2023 is more likely as immunity builds up, and normalisation of consumption, production and pro-growth policies provide positive effects. Strong pent-up demand and recovery in service consumption will boost economic growth in the rest of 2023 and into 2024.
  • We are overweight on Chinese equities and constructive on themes that will benefit from long-term policy support (e.g. tech self-reliance and green transition). For those Chinese stocks listed in Hong Kong, we see potential in travel and healthcare but short-term volatility will linger. 

Source: Wind, Bloomberg, HSBC Global Private Banking as of 13 December 2022. Past performance is not a reliable indicator 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