Outlook for 2020 Favourable in Face of Uncertainty
- Despite being in an “Age of Uncertainty”, low interest rates and supportive policies are expected to lead to steady growth in 2020
- A number of good carry opportunities to be found in selected fixed income and equity markets
- Within emerging markets, Asian equities and high yield bonds stand out due to attractive valuations
Investment markets have performed strongly across the board in 2019 with positive performances in both equity and fixed income. Looking forward to 2020, HSBC Global Asset Management (“HSBC”) expects to see a ‘favourable baseline’ despite the existing headwinds of uncertainty – anticipating slow but steady growth, low inflation and accommodative policies. Smart diversification across geographies and asset classes, as well as being selective, is key to success in the age of uncertainty. Meanwhile, market pricing looks attractive for some risky asset classes and good investment opportunities can be found in Asian equities and Asian high yield bonds.
This year there have been elevated concerns around a potential economic recession as well as heightened geopolitical uncertainty. Yet a global shift to monetary policy easing, led by interest rate cuts from the Federal Reserve (Fed), negative policy rates and quantitative easing from the European Central Bank and fiscal support from Mainland China have provided a cushion for markets.
According to HSBC’s global nowcast1, global economic growth has stabilised since April 2019. Dominic Bryant, Senior Macro Strategist, HSBC Global Asset Management explains, “Persistently low global inflation has allowed policymakers to focus on supporting growth through monetary easing in 2019. Looking ahead, there is likely to be greater emphasis on fiscal policy to bolster growth. With the impact of accommodative policies, coupled with tentative signs that the manufacturing cycle is bottoming out, we expect the global economy to maintain a stable pace of growth in 2020.”
The last 18 months have been characterised by US macro outperformance. US companies have delivered strong and stable earnings growth compared to other developed markets. For 2020, Bryant believes that “Policy easing by the Fed due to low inflation and robust consumer finances should support US growth to stay on its long-term trend. US core inflation remains below 2% and is likely to converge to target rate only gradually. In addition, US profit growth has strengthened since early 2019, so we do not think the risk of a recession is imminent.”
Attractive opportunities in Asian equities, led by earnings recovery and compelling valuations
Across global equities, HSBC believes Asia stands out because the relative underperformance of Asian equities in 2019 creates a significant valuation discount in this asset class. “Following a tough 2018, Asian equities have had a challenging but positive year in 2019. Earnings growth in 2020 is expected to rebound to the 10-15% level from low single digit growth in 2018 and 2019 and help support higher dividend yields from Asian equities. This should be driven by diverse markets such as China, India, Indonesia, South Korea and Taiwan, and could help in closing the compelling valuation gap between Asian and developed equities”, says Sanjiv Duggal, Director, Head of Asian and Indian Equities, HSBC Global Asset Management.
Amidst stabilising global growth, there are signs that certain key cyclical sectors in Asia, including the tech or semiconductor industry, are bottoming out. HSBC sees a better outlook for Asia’s semiconductor sector in 2020 amidst improved demand-supply dynamics, and driven by demand for 5G, AI and cloud data centres. Duggal adds, “The expanding Asian consumer base is a trend that is hard to ignore. Changing demographics, evolving consumer needs and a rapidly growing adoption of technology have created new and unique investment opportunities in the region’s markets. In particular, Chinese consumers and companies remain front and centre in the Asian consumption story. As their buying power continues to improve, we will see Chinese consumers shift more of their consumption to premium products and quality experiences.”
Valuation of Asian high yield continues to be compelling
Dovish policies by central banks have been key driving forces for the global bond rally in 2019, but the current backdrop of global economic slowdown and monetary policy easing will likely put a cap on the surge of bond yields. HSBC is positive on Asian credit given the yield carry advantage and diversification benefits of the asset class.
Alfred Mui, Director, Head of Asian Credit, HSBC Global Asset Management, says, “Within emerging markets, Asian credit is generating more interest from investment grade-focused investors, supported by higher credit ratings when compared to non-Asian emerging markets. Additionally, the asset class is supported by a strong local investor base, which helps reduce vulnerability to emerging market sentiment. Investor interest from China in particular remains healthy, bolstered by improving liquidity in the onshore market and Chinese investors’ desire to diversify and seek yield pickup. At the same time, yields look compelling and the valuation narrative for Asian high yield continues to be attractive.Prudent selection approach is key to the investment strategy with rising credit stress in the late cycle, even though there is no material systemic risk on the horizon.”
Looking ahead, various geopolitical risks can still pose a challenge for investors. However, HSBC believes the baseline for 2020 is still favourable and remains pro-risk in its asset allocation to ‘compound the carry’2.
Note to editors:
- Nowcast is HSBC Global Asset Management’s big-data analysis model that tracks economic activity for all the major advanced and emerging economies. It looks at over 1,200 different economic time series to help us monitor how growth trends are faring in real-time. The global trend growth is 2.13% with data as at December 2019, compared to the figure at 2.01% as at April2019.
- Carry refers to the return from holding the asset
- Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (Hong Kong) Limited accepts no liability for any failure to meet such forecast, projection or target.
This document is prepared for general information purposes only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. Any views and opinions expressed are subject to change without notice. This document does not constitute an offering document and should not be construed as a recommendation, an offer to sell or the solicitation of an offer to purchase or subscribe to any investment. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (Hong Kong) Limited (“AMHK”) accepts no liability for any failure to meet such forecast, projection or target. AMHK has based this document on information obtained from sources it reasonably believes to be reliable. However, AMHK does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information. Investment involves risk. Past performance is not indicative of future performance. Please refer to the offering document for further details including the risk factors. This document has not been reviewed by the Securities and Futures Commission. Copyright © HSBC Global Asset Management (Hong Kong) Limited 2019. All rights reserved. This document is issued by HSBC Global Asset Management (Hong Kong) Limited
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