LONDON – After a year of strong profits, investors should expect a “payback period” in 2022 as macroeconomic risks increase, according to HSBC Asset Management.
In its 2022 Investment Outlook, the bank said the record returns investors have seen over the past 18 months were largely “borrowed from the future”.
Joseph Little, HSBC Asset Management’s global chief strategist, noted that bond yields, spreads and risk premiums are all collapsing. The risk premium is the rate of return that an asset offers over the risk-free rate of return.
As a result, returns for many asset classes are lower than they were at the beginning of the year, he added.
“A complex macro outlook is exacerbated by higher valuations and lower margins of safety in the markets. We should expect inter-asset volatility to increase, ”said Little.
HSBC expects high single digit earnings growth as economic growth slows due to supply and demand imbalances and a gradual normalization of monetary policy. It envisages a slowdown in GDP growth to a range of 4% to 5% globally, with the UK and China at the higher end of that range and the US and Europe closer to the lower end.
The big risks
The two main risks on the demand side are a resurgence of Covid-19 or a “hard landing” in China, where credit crunch and regulatory tightening continue to constrain economic activity, Little said.
“We expect a number of targeted easing measures to be put in place, but the shared prosperity strategy means investors will have to accept that underlying growth in China is on the order of 5% for now,” he added.
On the supply side, the main risks are that supply chains will take longer to rebuild than the currency expects and that the effects of the distortions in global labor markets will continue, Little said. “There is evidence of Covid scarring, which means that ‘equilibrium unemployment’ is higher than most economists assume.”
“This could have serious social ramifications and mean central banks are wrong on inflation. Policy would have to adjust much more restrictively, leaving investors with limited options to hide, ”he added.
But despite this economic and market uncertainty, HSBC suggested that the broad growth / inflation mix remain favorable in 2021 after the “warp-speed economy”.
“We think the underlying regime is more like the 1990s, with an ongoing recovery, technological innovation, rising capital spending and policy experimentation,” Little said.
“If this is realized, inflation will be 2-2.5% in the fourth quarter of 2022. For 2023-25 we expect an inflation range of 2-3%.”
HSBC continues to see strong arguments in favor of global stocks, as stocks generally outperform bonds when labor markets improve, as is now the case as economies recover from their pandemic-era employment lows.
“Right now, financial conditions look simple, the stock premium is reasonable, earnings continue to grow, and that should be enough for stocks to outperform bonds,” Little said.
He added that a surge in bond yields should favor late-cycle and value stocks – those believed to be trading at a discount relative to their fundamentals – many of which can be found in Europe and Asia.
However, faced with a complex cocktail of macroeconomic challenges, HSBC is opting for a cautious “barbell” approach. A barbell strategy usually involves overweighting two different groups of stocks to hedge against uncertainty.
For HSBC, this includes defensive stocks – which offer constant dividends and earnings regardless of how the market continues to perform – such as quality companies and those tied to the ESG transition and digital economy, as well as cyclical names.
Fixed Income and Alternatives
HSBC also said he liked the look of fixed income and Chinese renminbi bonds versus global bonds, for both “superior carry and portfolio diversification.”
“Regardless of current risks, the future return profile of Asian loans looks very attractive compared to the US and Europe,” added Little.
As an alternative, HSBC Asset Management will focus on strategies to support cost-effective inflation protection and include sectors supported by “real” assets such as global and Asian real estate and infrastructure.
“Secular re-greening, the net-zero transition, and macroeconomic countercurrents should support select commodities, including carbon, copper and uranium,” Little said.
“In the meantime, allocating it to venture capital and climate technology is a sensible way to capture innovation and manage the fear of missing out.”