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HSBC Perspectives Q4 2024

Willem Sels

Global Chief Investment Officer, HSBC Global Private Banking and Wealth

Rate cuts and broadening earnings growth support our optimism despite slowing growth and rising uncertainties

Last quarter proved to be an eventful period for investors, as more central banks embarked on their policy easing journeys, while rising US recession fears and the sharp strengthening of the Japanese Yen triggered a global equity market sell-off. However, markets regained the lost ground very quickly, which is a good sign that fundamentals such as earnings momentum remain intact. Looking ahead, investors shouldn’t be surprised if market volatility lingers, especially as key central bank meetings and elections are approaching in the US. Yet, we remain positive, as there are still plenty of opportunities across regions and sectors to put money to work.

What does this mean for investors?

So far this year, equities are up strongly while bonds have been benefitting from rate cut expectations. Although the US economy is cooling, it’s still far from a recession, with Q2 earnings growth accelerating to 10.8%, which marks the highest growth rate since Q4 2021. And comfortingly, rising unemployment was caused mainly by an increase in labour supply rather than elevated layoffs. As fundamentals remain broadly positive, the August correction is seen as a buying opportunity as valuations are now more attractive.

The US remains our biggest equity overweight due to its broadening earnings growth and long-term structural opportunities. While the Magnificent 7 tech stocks continue to lead earnings growth, other companies are also benefitting from falling costs and the power of AI, which helps to expand revenue sources and improve productivity. The global rate cut cycle should also help investment and consumption outside of the US.

So, the key message for investors is to widen the opportunity set, by looking beyond the US and the technology sector. Geographically, the UK, Japan, India and South Korea stand out for their positive outlook. From a sector perspective, earnings hold the key, and we see promising opportunities in healthcare in Europe, high-end manufacturing in Asia and industrials in the US, to name a few.

Balancing risk and opportunity to manage rising market uncertainties

Undoubtedly, all eyes will be on the Fed’s policy decision and the upcoming US election, with polls currently suggesting a very close race. Historically, markets tend to rally once the election result is known, but uncertainty is surely building up. Diversification is key to balancing risk and opportunity, and we look to quality bonds, particularly investment grade credit, as another way to diversify exposure and generate a stable income stream. Rate cuts will make it less attractive to hold cash, while bonds continue to offer a chance to lock in current yields near multi-year highs.

Finally, we continue to see opportunities in the global transition to a more sustainable, low-carbon future. Renewable energy is a bright spot amid a global effort to triple clean energy capacity by 2030. The growing focus on biodiversity can also be a differentiator, offering investors a way to access potential growth while supporting long-term change.

As improving quality of life for our customers is at the centre of our values, we’re pleased to share our views in a special article on how financial planning can improve financial fitness, based on the findings of our Quality of Life Report 2024.

We hope our investment themes and insights can help you better position your portfolios in times of rising uncertainties and take your investment to new heights. As always, our investment team is here to share our view and provide you with the support you need.

Best wishes for a successful investment journey.

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Four investment themes to help shape your portfolio

Although US growth is widely expected to fall below its historical average, the economy remains resilient and should avoid a recession. Interest rate cuts, solid earnings momentum and long-term structural trends are still positive for the stock market. US equities account for two thirds of global equity market capitalisation, making them a key contributor to portfolio returns, but there are opportunities elsewhere too.

Economic cycles in the UK and the Eurozone have bottomed, and momentum is now gradually improving. However, we see more upside in the UK than in the Eurozone due to the UK’s more attractive valuations, better consumer confidence and relative political stability post elections.

We maintain a diversified approach to exploiting the dynamic growth in Asia. India’s strong fundamentals are further complemented by its budget focus on fiscal discipline and job creation. Both Japan and South Korea should benefit from corporate governance reforms and an increased focus on shareholder value, not to mention the opportunities arising from the AI trend. Valuations remain attractive in markets such as mainland China and Hong Kong.

We continue to overweight global equities, preferably US and UK equities, and look for resilient growth leaders at attraction valuations.
We diversify into Asia through exposure to India, South Korea and Japan to capture their fundamental strengths and structural opportunities.

While technology remains at the forefront in the US, earnings growth is accelerating in other sectors, such as industrials, healthcare and financials, that are benefitting from efficiency gains through the use of AI. We see structural tailwinds for industrials from re-onshoring and the support of both US presidential candidates, while rate cuts will lower borrowing costs and spur M&A activity. As a result, we expect a substantial earnings growth rate of 11% in 2024 and 14% in 2025.

In Europe, the opportunities in leading companies are broadening, and they’re also being propelled by tech innovation. For example, sentiment in healthcare is shored up by new revenue generation and margin improvement. Asia ex-Japan is forecast to deliver solid earnings growth of 25% this year, with many companies benefitting from the region’s leading position in technology. We like high-end manufacturing leaders in particular.

As a result, we broaden our exposure within and beyond technology, focusing on companies with strong market positions, healthy balance sheets and a drive for innovation, which are typically medium-to-large caps.

We see opportunities in a wide spectrum of sectors in the US, including IT, communications services, industrials, financials and healthcare.
We overweight European IT, energy and healthcare. In Asia, IT, communications services, industrials, consumer staples and utilities are preferred.

Falling inflation and mixed labour market data have raised expectations of more Fed rate cuts commencing this September. As the global rate-cutting cycle unfolds, cash returns will become less attractive. Bonds are compelling as both a diversifier and an income generator, especially when risks around geopolitical tensions and the US election are elevated. As the rate normalisation process in developed markets is expected to be gradual, investors still have the chance to lock in current yields near multi-year highs.

Following the sharp bond rally in August amid exaggerated rate cut expectations, we’ve downgraded Treasuries and gilts to neutral and reduced their duration to medium. However, investment grade bonds are still offering attractive credit spreads and historically perform well in a low, yet positive, growth environment.

The heightened uncertainties ahead in Q4 call for increased risk diversification. In addition to quality bonds, a multi-asset strategy, which invests in a mix of equities, bonds and other asset classes, can help investors stay invested with downside protection.

We favour investment grade bonds with medium duration (5-7 years) and Indian local currency bonds for their attractive yields and strong inflows.
A well-diversified portfolio, whether built by investors themselves or managed by professionals through a multi-asset strategy, is a good way to navigate uncertainties.

The global agreement at COP28 to move away from fossil fuels to carbon neutrality suggests huge opportunities in sustainable investing. The transition has led governments and companies to evolve their policies and business models. For investors, renewable energy and biodiversity are especially relevant.

While Europe and Asia are seen as pioneers in sustainable investing, the US is quickly building momentum, with a record 23% share of US energy demand coming from renewable sources in 2023[@hsbc-perspectives-q4-2024-01]. New solar farms and EV sales also saw unprecedented growth. Globally, energy storage is emerging as another bright spot. China is well in the lead with 43% of global storage capacity[@hsbc-perspectives-q4-2024-02].

The growing awareness of the impact of human activity on biodiversity has led to calls for investment and government initiatives, including the first national conservation goal in the US, which aims to protect, conserve and restore at least 30% of its lands and waters by 2030. The World Economic Forum’s Global Risks Report 2024 also identifies biodiversity loss and ecosystem collapse as one of the top three risks in the next decade.

We see structural investment opportunities in sustainable energy sectors, such as renewables, hydrogen, energy storage and carbon capture.
Companies that harness and preserve biodiversity could offer investors the potential to access growth and support long-term change.

Regional market outlook

Where should you invest your money?

US economic growth has been slowing, but a recession is unlikely. Easing pressure on input costs and the prospect of falling interest rates support US corporate profits, while technological innovation is boosting productivity, especially as more companies are eager to invest and bring production back home. Strong earnings momentum and Fed rate cuts provide solid tailwinds, and we maintain our positive view on US stocks. The November election could create some temporary volatility, but markets usually rally once the result is known. Until then, we remain invested in companies with strong market positions and spread our sector positioning across technology, communications services, industrials, financials and healthcare.

European economic growth is slower than in the US, but the region has nevertheless come out of recession and activity is seeing a gradual improvement. Rate cuts have already started in both the Eurozone and the UK, lowering companies’ funding costs and increasing market optimism. One of the big attractions of European stock markets is that they are trading at lower (cheaper) valuations than US markets. But within Europe, there’s more political uncertainty in the Eurozone, and more confidence in business and consumer sentiment in the UK. As a result, we maintain our neutral view on Eurozone stocks and our positive view on the UK.

Central and Eastern Europe continue to be affected by the Russia-Ukraine conflict and the slow pace of growth in the Eurozone. As a result, we maintain a cautious view on EM EMEA markets.

Ahead of the US election, where immigration and trade issues are high on the agenda, we could see some volatility in Mexico’s stock markets. In Brazil, the central bank will probably halt its cycle of rate cuts, while Brazilian exports could slow due to market concerns over a global slowdown. As a result, we maintain a neutral view on Mexican stocks and a more cautious view on Brazil’s equity markets. markets.

The economic outlook in Asia remains mixed. Chinese growth is unlikely to pick up sharply in the short term, while India continues to perform strongly. Australia benefits from a strong job market, while South Korea has seen sentiment swing in line with the global technology cycle. As the activity in the region as a whole will probably be held back until we see more evidence of an acceleration in China, we maintain a neutral view on most markets, with a few exceptions: Indian stocks and bonds benefit from short-term and more structural support, and we maintain our positive view on South Korean stocks thanks to their exposure to local and global technological innovation.

Japanese stock markets have been quite volatile in recent months as markets try to assess the Bank of Japan’s likely next steps on its path to interest rate normalisation. This continued re-assessment has created wild swings in the Japanese Yen, especially as the rate hikes in Japan contrast with expectations of rate cuts in the US. Fundamentally, however, we see support for Japanese stocks due to an improvement in economic growth and increased pricing power for Japanese companies. Shareholders are also happy to see rising dividends and share buybacks. The potential for further volatility doesn’t detract from our positive view on Japanese stocks, especially as many investors continue to look for diversification opportunities within Asia.

Key data to watch

Source: HSBC Global Research as at 30 August 2024. Estimates and forecasts are subject to change. India inflation forecasts are fiscal year.

Source: Bloomberg, HSBC Global Private Banking and Wealth as at 30 August 2024. Past performance is not a reliable indicator of future performance. The above market classifications are defined by MSCI Indices.

Source: Bloomberg, HSBC Global Private Banking as at 30 August 2024. Based on the average of weekly performance data from 1989-2023 covering the past five easing cycles. Past performance is not a reliable indicator of the future performance.

Source: Bloomberg, HSBC Global Private Banking and Wealth as at 30 August 2024. The above industry classifications are defined by S&P Dow Jones Indices.

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Notes

The above comments reflects a 6-month view (relatively short-term) on asset classes for a tactical asset allocation. For a full listing of HSBC’s house view on asset classes and sectors, please refer to our Investment Monthly issued at the beginning of each month.

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Investment Outlook: HSBC Perspectives Q4 2024

Rate cuts and broadening earnings growth support our optimism despite slowing growth and rising uncertainties

Four investment themes to help shape your portfolio

1. Broaden equity exposure geographically amid slowing growth

2. Power up your portfolio with earnings leaders across sectors

3. Navigate uncertainties with quality bonds or multi-asset strategies

4. Ride on the increasing momentum in the transition to carbon neutrality

Regional market outlook

Where should you invest your money?

United States

The Eurozone and UK

EM EMEA and EM Latin America

Asia (ex-Japan)

Japan

Key data to watch

US economic growth remains robust in developed markets despite slowing down, while Asia's growth appeal is underpinned by its solid fundamentals and structural upswing

We broaden our equity exposure across regions amid resilient earnings growth

Quality bonds tend to outperformed for at least six months after the Fed’s rate cut

We prefer quality industry leaders with strong market positions, healthy balance sheets and a drive for innovation across sectors

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