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Think Future 2023 Mid-year Edition

Your guide to the global investment landscape

While China’s full reopening and easing global energy prices boosted sentiment at the beginning of 2023, the banking turmoil that followed the collapse of Silicon Valley Bank caught the global financial markets off guard. But in spite of this, equity markets and diversified portfolios have done well. So what is driving this and what lies ahead?

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Investment themes

As inflation continues to ease in the US and energy costs moderate in the UK and Eurozone, we believe central banks are on track to end the tightening cycle very soon and then leave rates unchanged until inflation has fallen closer to their targets. This provides a favourable environment for risk assets.

While the US banking turmoil isn’t a systemic risk in our view, it’s important not to overlook the risks of credit tightening, which may weigh on economic growth and profit margins and have given rise to recession fears. But a strong labour market and low loan delinquencies support our view that even if a contraction occurred, it should be very mild.

Investment grade bonds can provide a buffer against slowing growth as well as better returns than cash in the next 6-12 months. As bond yields have probably peaked, and markets are starting to price in some rate cuts, it makes sense to lock in attractive yields for longer through medium-term maturities. Reduced rate uncertainty is also positive for equities and EM assets.

We continue to favour investment grade bonds across developed and emerging markets with maturities up to 5-7 years
For equities, we focus on quality companies with robust market positions and manageable leverage

Asia provides the upside risk to global growth with China in the driving seat. China’s post-pandemic reopening has revived the economy at full speed with GDP growth recorded at 4.5% in Q1, and we expect the momentum to accelerate in H2. Savings accumulated over the past three years provide abundant fuel for retail spending, and the government’s pro-growth policy direction will stabilise the property sector. We’ve raised our full-year China’s GDP growth forecast from 5.6% to 6.3% and expect strong corporate earnings growth of around 17% this year.

Asia is also attractive for its long-term structural opportunities. The net-zero transition, digitalisation and a rising middle class are all powerful drivers. India, now home to the world’s largest population, is a rising star with compelling opportunities in digital technology, green energy and smart manufacturing as it has strong investor interest and benefits from the tech upswing. ASEAN markets will also benefit from the return of Chinese tourists and increasing demand for commodities.

While Western economies are slowing, Asia is set to take centre stage for growth and will continue to attract inflows. Both equity and credit markets are relatively cheap. A well-diversified portfolio will benefit greatly from adding to Asian assets.

Our optimism lies with Asian ex-Japan, mainland Chinese, Hong Kong and Indian equities. Indonesia remains our top pick within ASEAN
We favour quality leaders in travel, airlines, mass consumption, hospitality, food and beverages and Macau gaming

A peak in policy rates will be a powerful tailwind for growth stocks and we see attractive opportunities in technology, fuelled by the rapid development of artificial intelligence (AI) and automation. While valuations aren’t that cheap, the sector is likely to see earnings growth well above GDP rates. China’s internet sector also offers ample opportunities and we see strong prospects for international online gaming, cloud computing, autonomous applications and fintech across Asia.

The combination of peak rates and Asia’s post-pandemic recovery is also supportive for other cyclicals such as consumer discretionary, communications and industrials. Chinese consumers made a new record of 274 million domestic trips during the Golden Week holiday in early May and we expect the momentum to continue. That said, we’re looking for more spending on high-end goods and services.

Our overall sector allocation is mildly pro-cyclical but we remain selective and favour profitable companies with a strong competitive position and the pricing power to defend their margins against rising input costs.

We overweight on technology, communications services, industrials and consumer discretionary in most regions
Rising risks in financial and limited upside for energy warrant our neutral stance in these sectors

Sustainability remains key to our investment process and we see ESG as a core component of portfolio construction. The energy transition and biodiversity remain our top ESG themes. Global action to address energy security is driving more investment into clean energy and transition fuels including natural gas, wind, solar and more.1 Companies that are leading the way in transitioning to renewable energy sources, generating their own energy and reducing their carbon footprint are blazing a trail for sustainability and are likely to outperform their peers in the medium to long term.

Biodiversity is essential for the future of the planet and underpins the global economy. Natural ecosystems provide services worth a staggering USD125-140 trillion annually, roughly 1.5 times global economic output each year2. We believe companies that prioritise biodiversity conservation can generate positive environmental and financial outcomes, improve brand reputation, gain market share and increase customer loyalty. Investments in nature also offer diversification benefits as their value isn’t directly related to the economic cycle.

Improved access to sustainability data allows investors to make more informed decisions and we’re seeing industry participants increasingly adopt ESG rankings to evaluate a company’s commitment to sustainable practices. Disclosure requirements are also encouraging companies to allocate more resources to sustainability initiatives. This is a trend not to be missed.

We favour the long-term structural trend of energy transition, particularly in renewable energy, green infrastructure and energy efficiency
Biodiversity opportunities in sustainable agriculture, responsible forest management and the circular economy offer diversification benefits and potential returns in the long run

Regional market outlook

The continued fall in inflation should allow the Federal Reserve to stop its rate hikes soon and this is boosting market sentiment and valuations. Although the economy is slowing, we don’t think a recession is likely even though this can’t be ruled out. Moreover, in the latest earnings season, many companies protected their margins and beat earnings expectations thanks to cost-cutting measures and investments that lift productivity. The imminent end of the rate hike cycle has helped rate-sensitive technology stocks and this is an additional reason why we remain overweight on US equities given the large weight of tech stocks in the US market.

Over the next 6 months, we’re overweight on:

US equities in general, particularly the communications services, technology, consumer discretionary and industrials sectors
US investment grade bonds (medium maturities)

The Eurozone and the UK went through an energy crisis last year but since oil prices have fallen back and the winter was milder than expected, risk appetite has improved. The economy seems to have escaped a recession and business and consumer confidence has passed the weakest point. We maintain a neutral view as inflation remains more elevated than in the US and markets therefore fear more rate hikes than in the US. We focus on companies with strong earnings power or on those that can benefit from improving exports to Asia.

Over the next 6 months, we’re overweight on:

Energy, healthcare, utilities, industrials, technology and consumer discretionary sectors in Europe
European and UK investment grade bonds (medium maturities)

We’ve a positive view on Latin American equities for several reasons. Valuations in the region are relatively cheap and they’re supported by monetary policy: Brazil’s central bank has been cutting rates for some time and Mexico’s may start cutting rates in Q3 2023. The recovery we’re seeing in Asia typically helps Latin America. As for EM EMEA, we’re significantly underweight on Central and Eastern Europe given geopolitical risks but are constructive on the Middle East given the rapid diversification of the region’s economies and still solid energy revenues.

Over the next 6 months, we’re overweight on:

EM Latin American equities, particularly Mexican and Brazilian equities

We’re bullish on Asian equity markets as China’s reopening fuels economic momentum in the region. This should particularly benefit the consumer and services sectors. China’s commitment to at least 5% GDP growth is another positive and we think GDP growth will actually exceed that and reach 6.3% in 2023. As for India, it’s benefitting from strong investor interest, cheap oil, growing wealth and the tech upswing. All of these should start to boost earnings growth in the region, in sharp contrast with the West, where earnings are slowing. In addition, Asian equities are comparatively cheap, adding to the attraction for investors.

Over the next 6 months, we’re overweight on:

Consumer discretionary and staple and communications services
Asian investment grade bonds (medium maturities)

Japan’s stock market performance depends heavily on the outlook for the Japanese Yen (JPY) and therefore on the Bank of Japan’s (BoJ) monetary policy. Markets had assumed that the BoJ would want to tackle inflation by targeting higher bond yields but the new governor has not yet given any signs in this direction and inflation has now started to come down. If higher rates are targeted, this could lead JPY to strengthen and stocks to fall. If not, other factors should dominate, but the benefit coming from improved momentum in Asia should be offset by the challenges posed by weak global trade.

Our neutral stance on Japanese equities remains unchanged as we expect lacklustre economic growth in the near term

Key data to watch

Source: HSBC Global Research as at 19 May 2023. Estimates and forecasts are subject to change. India inflation forecasts are fiscal year

Source: Bloomberg, HSBC Global Private Banking as at 22 May 2023. Past performance is not a reliable indicator of future performance

Source: IMF, HSBC Global Private Banking as at 22 May 2023.

Source: CEIC, HSBC Global Research forecasts, HSBC Global Private Banking as at 22 May 2023. Forecasts are subject to change.

Source: Bloomberg consensus estimates, HSBC Global Private Banking as at 22 May 2023.

[Investment Outlook] Think Future 2023 Mid-year Edition

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[FX Trends] Room for EUR upside, but mixed prospects for others

Our bearishness on the US Dollar Index (DXY) mostly reflects our near-term EUR view. [23 Jun]

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As expected, the FOMC chose to skip a rate...[19 Jun]

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[Investment Outlook] Think Future 2023 Mid-year Edition

Your guide to the global investment landscape

Investment themes

1. Position for the peak in policy rates

2. Seize opportunities in Asia’s accelerating growth

3. Increase exposure to profitable cyclical sectors

4. Achieve sustainable returns via energy transition and biodiversity

Regional market outlook

United States

Eurozone and UK

EM Latin America and EM EMEA

Asia (ex Japan)

Japan

Key data to watch

We expect a downward trend of inflation and Asia will drive global growth in H2

In spite of the uncertainties, equity markets should continue to do well thanks to peak rates and Asia’s recovery

Asia accounts for more than one third of global GDP and its share is still rising

Asia’s growth acceleration versus DM slowdown

US company earnings are set to rebound in H2 2023 and 2024

[Investment Outlook] Think Future 2023 Mid-year Edition

[FX Trends] Room for EUR upside, but mixed prospects for others

Special Coverage: A hawkish pause?

Disclaimer