HSBC Asset Management (HSBC AM) believes that entering the 2H2021, the global economy is transitioning from a “restoration phase” to an “expansion phase” of the cycle.
Noting that output has fully recovered in the US, China and across industrial Asia, the asset manager highlights that corporate profits have “rebounded sharply”, with earnings expectations for 2022 ahead of pre-Covid forecasts.
With inflation pressures building, HSBC AM views that the policy debate has moved on to the timetable for Quantitative Easing (QE) tapering and policy lift-off.
Short-term inflation pressures are expected in the 2H2021, given the supply constraints faced by the US following the size and speed of its fiscal policy stimulus. Longer-term, HSBC AM expects inflation to settle at just above 2%.
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To that end, HSBC AM believes that Federal Reserve can remain dovish and not deliver the first rate hike until late-2023.
For China, which is currently in the most advanced cyclical position, HSBC AM expects the growth to be moderate as credit softens and demand for Chinese exports falls over the rest of the year, and the focus will tilt away from growth towards financial stability. Chinese policymakers are deploying a gradual and flexible policy normalisation – lowering total social financing and adopting a more hawkish regulatory stance, which should keep inflation muted and mitigate the risk of overheating.
“The first half of 2021 has been challenging for many Asian economies amid Covid worries and restrictions. However, as vaccinations pick up, domestic demand and services should rebound in the second half and into 2022 in a favourable global demand environment,” says Cecilia Chan, chief investment officer, Asia-Pacific.
“Overall stable macro policy to sustain the recovery with inflation broadly contained is expected across most economies in Asia in the second half of this year,” Chan adds.
HSBC AM also views a transition is towards the “mission economy”, characterised by a more active fiscal policy in the main economies. For investors, it means an increased risk of higher inflation and a bigger role for government intervention in supporting green and inclusive growth with higher levels of investment.
In this scenario, how investors build portfolio resilience will be a critical decision. Chan notes that expected returns are lower for longer in many liquid asset classes, while the higher inflation regime “undermines the diversification properties” of global government bonds.
“We are thus focused on titling portfolios towards less expensive and potentially more reliable diversifiers within Asia fixed income and alternatives, such as RMB bonds and infrastructure debt. On the equities front, we continue to see relative value in Asian and Chinese equities,” she says.
HSBC AM views that for Asian stocks, fundamentals remain strong and have exposure to structural themes as well as cyclical stocks linked to the global growth recovery. Alexander Davey, global capability head for active & quantitative equity, says that the environment remains favourable for an Asian high dividend strategy. “Overall, we believe Asian equities still offer attractive risk-adjusted returns due to good growth and liquidity support. Earnings growth is forecast to rebound strongly in 2021 from minus -4% last year,” he comments.
HSBC AM favours key investment themes in 5G, life insurance and digitalisation. “Technology hardware companies in Taiwan and Korea remain attractively valued, and are key beneficiaries of faster technology adoption. Given the current low Asian insurance penetration, coupled with people’s increasing awareness of health triggered by COVID-19, we believe insurance markets in countries such as China are providing market share gain opportunities,” Davey explains.
While the fixed income asset classes globally generally underperformed equities in the first half, HSBC AM notes that China has been the stand-out positive bond market this year, supported by good carry, a strong yuan, and low correlation versus other assets.
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Elizabeth Allen, head of Asian fixed income, believes there is a case for investors to look to Asian bonds as a substitute for global bonds. “RMB onshore bonds continue to look attractive, with ten-year government bonds currently trading at a substantial yield premium versus other comparable global bonds. Likewise, Asia credit benefits from higher spreads and lower duration versus other global credit markets while still enjoying low default rates,” she says.
Ultimately, investors are advised to be prepared for the coming cyclical transition, a lower phase of investment returns, and a policy regime shift which heralds mission economy risks and requires a strategic repositioning away from global bonds.
Photo: Bloomberg
