A new decade, a new path for investments - Investment Outlook First Quarter 2020 - HSBC Private Bank
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A new decade,
a new path for investments
Investment Outlook
First Quarter 2020
Investment Outlook First Quarter 2020 1
Contributors
Global Chief Market Strategist Global Investment Strategist, Managing Editor
Willem Sels Neha Sahni
willem.sels@hsbcpb.com neha.sahni@hsbcpb.com
+44 (0)207 860 5258 +44 (0)20 7024 1341
Head of Asset Allocation
Stanko Milojevic
stanko.milojevic@hsbcpb.com
+44 (0)20 7024 6577
Regional Chief Market Strategists
Belal Mohammed Khan Cheuk Wan Fan
belal.mohammed.khan@hsbcpb.com Cheuk.wan.fan@hsbcpb.com
+41 (0)58 705 5273 +852 2899 8648
Jose Rasco Jonathan Sparks
jose.a.rasco@us.hsbc.com jonathan.sparks@hsbcpb.com
+1 (1)212 525 3264 +44 (0)20 7860 3248
Patrick Ho James Cheo
patrick.w.w.ho@hsbcpb.com james.cheo@hsbcpb.com
+852 8525 8691 +65 6658 3885
Global Head of Fixed Income Global Head of Equities
Laurent Lacroix Kevin Lyne Smith
laurent.lacroix@hsbcpb.com kevin.lyne-smith@hsbc.com
+44 (0)207 024 0613 +44 (0)207 860 6597
Global FX Coordinator Senior Fixed Income Credit Specialist
Nicoletta Trovisi Elena Kolchina
nicolettatrovisi@hsbc.com elena.kolchina@hsbcpb.com
+44 207 005 8569 +44 0207 860 3058
Global Market Analyst, Real Estate Investment Head of Alternative Investment Funds
Guy Sheppard William Benjamin
guy.r.sheppard@hsbc.com william.a.benjamin@hsbc.com
+44 (0)207 024 0522 +44 (0)207 024 1546
2
Contents
Letter to clients 05
Portfolio Strategy 06
2020s vision – views on the next decade 10
Modern Monetary Theory: 12
unlimited free money?
Expected returns for the 2020s 14
Themes16
• Investing in a low yield world 16
• Sustainable investing 17
• Industrial Revolution 4.0 19
• Seeking EM Structural growth 20
Equities22
Fixed Income 24
Currencies and commodities 28
Hedge Funds 32
Private Markets 34
Real Estate 35
Disclaimers36
Investment Outlook First Quarter 2020 3
Investment Outlook Q1 2020 Investment Outlook Q1 2020
A new decade, a new path for investments A new decade, a new path for investments
4
Welcome
Message from our Global Chief Market Strategist
Dear client,
The past decade has been kind to The lower than normal economic growth and households could use some of their
investors, with the US economy staying we expect for 2020 and 2021, and the significant cash balances and invest,
out of recession for a record 10 years over-optimistic consensus earnings raising productivity and growth. This could
(and counting) and unprecedented central expectations provide a challenge for ultimately lift interest rates and inflation
bank policies lifting market valuations to investors too. To boost the return potential a bit. It could take time before there is a
new highs. The next decade however will of portfolios, we don’t think the answer political consensus to do this though, and
most likely see a recession at some point, lies in taking higher cyclical risk, and so, for the moment, we continue to invest
or economists will have to throw away instead focus on quality companies with under the assumption of low growth and
their text books. And while central bank sustained earnings growth. We also low inflation.
policy should remain accommodative, it look for long term growth in promising
is starting to test its limits. So while the sectors, geographies or themes related We are optimists however, and believe
stroke of midnight on 31 December does to the Fourth Industrial Revolution or that the ageing, urban, digital, mobile,
not mean that everything changes, it is Sustainability. Hedge funds should be able sharing-based, knowledge-based, circular,
clear that the new decade will mean a new to capture growth opportunities, while fast-paced and increasingly Asian global
path for investments. typically being less exposed to market economy provides companies and
corrections or to the economic cycle. And investors with plenty of opportunities.
Investors ideally like their portfolios to private equity can help tap into long term We think it will be important to constantly
give them income, growth and stability. themes, reduce the market timing risk, and keep the three objectives of income,
But with cash rates and bond yields in help look through short term volatility and growth and stability in mind, to not leave
developed markets near record lows, geo-political uncertainty. money on the table, miss opportunities,
global economic growth below normal, or take excessive and concentrated risks.
and political uncertainty creating potential A multi-faceted investment strategy is thus Diversifying risk exposures is especially
volatility, these objectives will not be as needed to achieve the three objectives of important when broad-based market
easy to achieve as in the past. income, growth and stability. But in a low upside is lower than in the past, and
growth and low interest rate environment, political risks remain high. But sometimes,
Indeed, our 10-year future return returns are unlikely to be as high as they the new paths lead you to the most
expectations have come down, and in were in the past decade. interesting sights.
coming years, our investment strategy
will therefore need to follow new paths to What could change this? The We would like to wish all our clients a
achieve our three objectives. To achieve ‘Japanification’ of the Western world – low happy and prosperous 2020 and a good
an adequate level of income, we believe growth and low inflation - is largely the start to the new decade.
portfolios should avoid excessive cash consequence of ageing populations and
balances on which rates are just too the long lasting hangover of the credit
unattractive. We also avoid the lowest crisis. Fundamentally, many households,
rated end of high yield because valuations and corporates even more so, are not
are just too tight and the weak economy optimistic enough about the economic
is a risk to that part of the HY universe. outlook to invest and boost economic
Instead, we favour USD investment grade, growth. Progress on a US-China trade deal
emerging markets’ local and hard currency could help take some uncertainty away. Willem Sels,
debt, but complement this with dividend But increased fiscal spending and market Global Chief Market Strategist
stocks, real estate and private debt friendly reforms are probably needed. If
instruments to generate further income. investment in infrastructure, green energy 4th December 2019
Where appropriate, some leverage can and 5G for example were to kick-start
help boost the net income of portfolios. the global economy, both corporates
Investment Outlook First Quarter 2020 5
Portfolio Strategy
Investors will need to combine a number of strategies to try to achieve enough income, growth and
resilience for their portfolios.
Global economic growth may be bottoming but will still remain lower than normal. Before investors move
to a more risk-on stance, geo-political uncertainty will need to decline.
Three challenges for 2020 volatility views, but have a higher yield lift returns and income, and we think the
Investors typically want three things than cash. Dividend stocks are another cost of leverage is unlikely to increase, as
from their portfolio: income, upside to tool in the box, because they now provide most central banks are either on hold or in
valuations, and low volatility. But as we income that exceeds investment grade easing mode.
enter 2020, these objectives are real yields in Europe, and Treasury yields in the
challenges, because the yield on offer in US. Of course, any investment in dividend
stocks needs to be appropriately sized, Challenge 2 - Low growth.
many bond markets is near historical lows,
economic growth is lower than normal, because their risk profile is closer to that In the past 6 months, we have been
and policy uncertainty is very elevated. of equities than that of bonds. One also positioned for slower economic growth,
So how should a good investment needs to be selective to ensure that the but have remained invested because we
strategy respond? company can continue to pay the dividend do not expect a US recession. A US-China
in a slow growth environment. Many partial trade agreement may signal that we
managed solutions, in fact, combine all are beyond the weakest point in the global
Challenge 1 - Low income. of these strategies to address the income monthly economic data series, but 2020
As regular readers will know, we believe challenge, by taking measured credit risk, GDP growth will still remain below normal,
the low cash and bond yields are largely selling options, and mixing equities and at 1.7% in the US, 0.7% in the EU and
a structural phenomenon, and here to bonds – all under a strict risk approach. 5.8% in China. Earnings growth may pick
stay. That is because inflation is capped Additionally, private debt and real estate up from the Q3 low, but 2020 consensus
by consumers who compare prices online, can provide a longer term approach to expectations are still too high. So while
while the Chinese savings surplus and income generation, and provide further any bottoming of the data could lead to
global ageing also keep bond yields low. diversification. Finally, using some short term outperformance of equities
Cash rates are unlikely to rise any time leverage, where appropriate, can help and cyclical assets, the ‘slow for longer’
soon, and investors who are sitting on a
lot of cash may therefore be disappointed
Low for longer: cash rates and safe haven bond yields should remain low
by returns. Moreover, investors with
large cash holdings are often tempted to 8
US Fed funds 10-year US Treasury yield
complement them with high risk assets,
7 ECB repo rate 10-year German Bund yield
such as low-rated high yield, to try to
achieve their overall target portfolio return, 6
but holding such assets is not ideal in a
5
low growth environment.
4
Instead, holding USD investment grade,
3
%
EM hard currency and local currency
bonds achieves a better balance between 2
risk and income.
1
These assets are our main overweights 0
in fixed income, and form the core of
-1
our solution to the income challenge.
In addition, part of any cash balance -2
can probably be allocated to cash Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
enhancement strategies, which take some Source: Bloomberg, HSBC Private Banking as at 4 December 2019. Past performance is not a
short term credit risk or currency and reliable indicator of future performance.
6
Slow for longer: global economic growth is unlikely to pick up in 2020 We also focus on investment themes
which are supported by structural trends,
2017 2018 2019 2020 (F) 2021 (F) to lower the sensitivity to the short term
8 economic outlook. These include themes
Real GDP growth and forecasts (%)
7 such the Fourth Industrial Revolution,
EM seeking Structural Growth and the
6
opportunities linked to the move towards
5 a more sustainable world. You can read
4 much more on this in our Themes section.
3
2 Challenge 3 - Low visibility
1
Investors are used to handling uncertainty
around the economic, earnings and
0 interest rate outlook. But they are often
US Eurozone UK China India Latin America
much less comfortable with taking a view
Source: HSBC Global Research as at 4 December 2019. Forecasts are subject to change. on politics, and so are we. Geo-political
tensions are not just present between
growth environment means that such and overweights in European consumer the US and China, but in other regions
outperformance would not extend very far. staples and utilities. By comparison, we of the world as well. Gold tends to be a
hold a more neutral cyclical stance in the good hedge against uncertainty, and we
To address this second challenge, a US and Asia. Geographically, we have maintain our overweight position to hedge
multi-faceted and balanced approach is closed our underweights in Germany and the risks that are not cyclical in nature.
again warranted. First, we choose our Taiwan, on signs of progress regarding the
sector and country exposure to adapt to US-China trade deal. But in China, we still And of course, US elections in 2020
the slow cycle. Sector-wise, we maintain maintain a focus on domestic themes and will lead to many headlines, which will
a defensive approach in Europe, with areas that benefit from policy stimulus, to lead to two-way volatility, and create
an underweight in European industrials, limit direct exposure to trade headlines. a risk on / risk off type of environment.
Active strategies that buy the dips and
sell the rallies should be well suited to
this environment, especially if a lack of
Credit yields have dropped relative to dividend yields direction in growth or interest rates keep
markets in a range.
US dividend yield EM dividend yield
12
Europe dividend yield US BBB yield
Diversifying remains key but is harder
10 to achieve
Low bond yields not only provide investors
8 with an income challenge, but are
challenging from a portfolio diversification
6 perspective too. The very low (and
%
sometimes negative) safe haven bond
4 yields mean that some investors don’t
hold safe haven bonds anymore, and are
less well diversified. And if Treasury yields
2
cannot fall much further from the current
level, they may not protect as well against
0 a fall in equities as they did before.
Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17
Source: Bloomberg, HSBC Private Banking as at 4 December 2019. Past performance is not a
reliable indicator of future performance.
Investment Outlook First Quarter 2020 7
So, investors will have to look for markets for several years, and remains in recently than they did in the past on such
additional diversification strategies. By place, as global liquidity remains ample. occasions, and hence should rally less
definition, exposure to any asset that is Under this ‘cheap money’ regime, the from here as well. In addition, even if
not perfectly correlated to the core equity main message for investors is to be business sentiment improves somewhat,
position you hold, will help diversify invested, and not to be in cash. economic growth should still remain
the portfolio. So, firstly, geographical below normal, and political uncertainty
diversification helps, and with an But where investors choose to put remains elevated.
increasing number of markets facing their money to work largely depends
geo-political risks, it is prudent to avoid on their risk appetite, and therefore on Fiscal spending could be another game
excessive concentration in any market. the economic cycle. For much of 2019, changer, but this again depends on
the cyclical outlook has been too weak politics, and may take time to materialise.
We also like to take advantage of the and uncertain for us – and for global Advocates of Modern Monetary Theory
opportunities in equity markets while investors - to jump into the most cyclically (MMT) believe that governments can
limiting directional exposure, to protect sensitive areas of the market or support spend more without any negative side
against potential temporary downside, value stocks. Instead, investors have effects. After a decade of austerity in
and recognising that aggregate market been willing to pay a premium for quality Europe, governments may be ready to
upside may be muted. Active managers stocks with stable earnings growth, and loosen the belt a bit, but are unlikely to
and equity market neutral hedge funds have favoured investment grade when move to the other extreme very quickly.
should be well placed to do this, and can capturing carry in fixed income (high yield We see some potential for investments
try to generate excess returns (alpha) is more cyclical). in infrastructure and green energy,
by picking the winners and avoiding the benefiting our ‘All electric’ investment
losers from disruption (see our hedge Not all riskier assets need a strong theme. But the fiscal spending we
fund section). And for those investors who economic cycle, however. Some foresee is unlikely to drive up inflation and
can take a longer term view, private equity companies and geographies can government bond yields. Still, market’s
can help look through the cycle, and outperform because they benefit from inflation expectations are too low, and if
help avoid behavioural biases that often structural growth. We have been seeking CPI were to rise (for example, because of
lead investors to buy and sell at the out these areas, principally through our tariffs, obstacles to global competition in
wrong moment. thematic investment ideas, which focused the labour market, oil price base effects
on these sustainable trends. We have or global warming causing food prices to
also been overweight technology, which rise) it could hurt both equities and bonds.
What lies ahead? performed well for most of 2019, and This is why holding some gold and US
Many factors can drive up asset prices, which fits with this desire to look for long inflation-linked Treasuries (TIPS) makes
but among them, we believe that three term growth, that is not too sensitive to sense, in our view.
are crucial (see table). Which one of the the current economic cycle.
three is dominant, can determine the kind The pickup in the economic cycle thus
of assets that should outperform. For 2020, our core macro-economic depends either on a US-China trade
scenario of low rates and low growth, agreement, or on fiscal spending. Markets
First, global liquidity and ‘cheap money’ argues in favour of remaining invested, may be willing to anticipate some of the
can create very broad-based asset price while managing cyclicality and focusing good potential news, but should not
inflation, boosting bonds, equities, real on companies and themes with fully price in such scenarios before they
estate and commodities at the same structural growth. materialise. Until our ‘low for longer’
time. This factor has been supportive for rates trend, and ‘slow for longer’ growth
But what could change this strategy? trend are challenged, we remain invested,
For now, it seems premature to take with a highly selective and diversified
Drivers 2019 2020 a much more positive stance on the approach, selling the rallies and buying
outlook global economy, but we recognise that the dips.
Global Very Supportive a broader than expected US-China trade
liquidity supportive agreement could boost global growth
and optimism. Some business sentiment
Economic Negative Neutral surveys have started to bottom out,
cycle and investor sentiment often improves
when this is the case. But we wouldn’t
Structural Supportive Supportive get too carried away. Risk assets sold off
themes less when business sentiment declined
8
Investment Outlook First Quarter 2020 9
2020s vision –
views on the next decade
At the dawn of a new decade, we In the 2020s, the recipe is likely to change, As countries formulate their answers
examine which trends of the 2010s and fiscal spending should gradually pick to slow growth and to the decline of
will continue or fade, and which new up. In the UK, both the Conservatives manufacturing, they are likely to work
trends may develop in the 2020s. and Labour have promised to increase with their neighbours, and create further
spending, while in Europe, the typically regionalisation. It’s clear that globalisation
We have written a lot about the weakness frugal Germany is now growing so slowly has stalled, and regionalisation is gaining
in manufacturing data, and linked this to that spending may need to increase. We traction as a way to secure resource and
the trade tensions between the US and think there could be increased spending markets, limit the impact of tariffs, and
China. But this decline is also structural in green energy, given the clear need, and be able to compete with other economic
in nature, especially in the developed the commitment of governments around blocks. China has a clear and explicit
markets. Manufacturing has been shifting the world to the climate goals. This would strategy of regionalisation, and we believe
to the East and the South for decades. clearly benefit our All Electric theme. We it will help it to become the number 1
And as the sharing economy allows also believe that 5G investment will pick economy by the end of the 2020s. India
people to use cars without owning them, up, as countries do not want to be left will become the number 3 economy, in
and stream music without the need for behind in the trend to make everything our view, though more because of organic
CDs, we need to produce fewer ‘things’. ‘smart’, from ‘smart cities’ to ‘smart growth than through trade links.
factories’ and ‘smart government’. The risk
Consumers put less emphasis on buying to this view is that governments’ room for Not every country will manage this
items to stuff into their small urban flats, investment may be limited by the need transition well, and political decision
and instead prefer spending their money to spend more on pensions and social making will remain important for
on interesting experiences, supporting the security. In the Eurozone in particular, investors to consider. In the age of fast
leisure, travel and entertainment industries. it may also take more time, or more news, political headlines will continue
The transition from a manufacturing-heavy economic weakness, before governments to create a lot of volatility. We think in
economy to a knowledge economy decide to act. such an environment, hedge funds
dominated by services is a painful one and and active managers are well placed to
has left many people behind. Wages have And if fiscal spending leads to a take advantage of the volatility, while
grown more slowly than usual, in part somewhat better outlook for growth, investments in private markets allow
because unionisation tends to be lower in companies may again feel optimistic investors to look through the noise.
the services sector than in manufacturing. enough to start to invest more and use
And of course, economic growth their rich cash balances. They need to,
has slowed as countries go through because productivity growth has been
this transition. very weak. Profit margins have so far
been supported by falling interest costs,
The policy mix used during the 2010s to but that tailwind is now largely behind us,
address some of these challenges has and if wage inflation starts to rise because
not been very effective, but was dictated of full employment and global ageing,
by the credit crisis. Fiscal austerity was this could hurt margins. Global warming
needed to cap debt growth in Europe, but may also put some upward pressure on
severely cut government infrastructure food price inflation. Inflation should not
and other spending. And while central rapidly accelerate, but it is more likely to
bank rate cuts and quantitative easing rise somewhat than fall in coming years.
were intended to make borrowing There are many innovations, including
cheap and available, many companies automation, robotics and AI, which will
and households have not felt optimistic help companies raise productivity and
enough to borrow to build a new factory or protect their margins, and ultimately lead
a new house. QE has managed to create to a pickup in growth.
asset price inflation, but has not managed
to kick-start growth.
10From monetary
accommodation
to fiscal stimulus?
From
globalisation to
regionalisation?
From corporate
cash to business
investment?
From disinflation
to price stability?
Investment Outlook First Quarter 2020 11Modern Monetary Theory:
unlimited free money?
Interest rates are on a downtrend around ‘fiscal compact’. The world’s two largest with traditional economic models, and
the world, prompting many observers to economies both have similarly large fiscal we believe that there is an upper limit to
wonder if governments should use this deficits but China arguably has more room government spending because eventually
‘cheap money’ to boost fiscal spending to to ease given its lower central government the markets would start to price in an
lift economic growth. A body of research debt. In the US, there was an initial boost inflation risk premium. Markets may also
by economic institutions argues that when to growth following the tax reforms, but fear that a government may choose to
interest rates reach the ‘zero bound’, as more recent sluggish growth has led to default, perhaps because previous fiscal
they have in the Eurozone and Japan, calls from more innovative policy action. spending did not yield the expected
a combination of monetary and fiscal gains to economic growth. It seems hard
policy is required. Former ECB President Modern Monetary Theory (MMT) is at to imagine that persistent government
Mario Draghi has repeatedly stressed the the heart of this soul-searching and has over-spending, financed by the central
benefits of well-targeted structural reforms become a new buzz-word. MMT argues bank, would not eventually be seen as
and fiscal policy as a complement to his that a sovereign nation that prints its own a giant Ponzi scheme, even with the
accommodative monetary policy. And currency and has a floating exchange “exorbitant privilege” the US commands
towards the end of his tenure he became rate typically only defaults if it chooses by being the dominant currency of
even more direct, saying “if there were to to do so. For example, MMT proponents the world. In our view, the scope for
be a significant worsening in the Eurozone consider the US Treasury and Federal countries to ‘print and spend’ depends
economy, it’s unquestionable that fiscal Reserve as one consolidated sovereign on the credibility of the central bank, the
policy […] at the euro area level becomes entity, as all profits of the Fed are remitted government’s default track record, its
of the essence”. This view is backed up back to the Treasury. And many of the current deficit and debt level, and whether
by an OECD simulation where euro area bonds issued by the Treasury have or not a large part of the debt is held
public investment was raised by 0.75% been bought by the Federal Reserve by foreigners.
of GDP for five years, alongside structural in a process called quantitative easing
reforms to boost productivity. It resulted (QE). The sovereign effectively has a This is not to say that targeted amounts
in a 0.8% boost to GDP after the first year, monopoly on money and can therefore of central bank financed investment could
compared to just 0.3% for Quantitative ‘print’ as much as it likes without recourse, not yield positive results, especially when
Easing alone, with strong results for because money is a liability that cannot be rates are at the ‘zero bound’, when risks
long-term growth too. Furthermore, their exchanged at the Fed for any commodity of an inflation spike are low. But MMT is
modelling produced less asset-price or other asset of the state, since the US left unlikely to become the norm in monetary
inflation because fiscal support is typically the gold standard. policy any time soon. We thus foresee
more targeted than monetary support. only a measured pickup in fiscal spending,
MMT therefore argues that the sovereign which may take some time to materialise.
As our chart illustrates, the room for can finance spending, and this point is And ideally, as Mr. Draghi argued, this
fiscal easing varies greatly from country widely accepted. But MMT goes one step would go hand in hand with productivity
to country. Within Europe, Germany has further by arguing that there are no limits boosting reforms.
ample fiscal room while Spain and Italy to this process, and that it will not lead
risk facing EU penalties for breaking the to inflation. This is where MMT conflicts
12Room for fiscal spending is not limitless
4
2020 Fiscal balance, % of GDP
2 Fiscal tightening
Russia
Australia
0
Canada
France
Germany
-2 Japan
UK
US
-4 Italy
Fiscal loosening
Brazil
China
-6
-8
-8 -6 -4 -2 0 2 4
2019 Fiscal balance, % of GDP
Source: Bloomberg, HSBC Private Banking as at 4 December 2019.
Investment Outlook First Quarter 2020 13Expected returns
for the 2020s
Forming expectations 2000-2003 and the 2008 market collapse
All humans are susceptible to various triggered by the worst financial crisis since
psychological biases, and this also the 1930s. This decade is still fresh in
happens when we form our expectations many investors’ minds, rendering them too
around market returns. Investors often fearful as a result. But a look at our table
anchor to recent experiences and below shows that the events of the 2000s
over-extrapolate recent returns into the were indeed very unusual. We believe
future. But the decade behind us was that a repeat of such events in the coming
pretty strong for equities, with the S&P decade is far less probable than some
500 returning 12.7% p.a in nominal terms. investors perceive them to be.
Although economic growth was slow,
none of the major economic blocks went So, how does our outlook for the 2020s
into recession for more than 10 years. compare to history? As shown in the
But as the cycle matures, we should not table below, our expectation is that the
base our expectations solely on recent US Stock market would return 6.1%. At
trends, and instead focus longer term first glance, 6.1% may come across as
potential growth. pessimistic, but inflation expectations are
relatively low as well. In fact, a 4.1% real
On the other hand, people sometimes return (i.e. net of inflation) over a ten-year
overestimate the probability of disastrous period is not unusual, and four out of ten
events. The 2000s were the worst decades saw real equity market returns
decade in the century for stock market below this figure. As such, we would
investors, marked by the dot-com crash in label our forecasts as realistic, rather
than pessimistic.
Historical US market returns and expected returns for 2020-2030 (annualised)
Decade Stocks Bonds 60/40 Inflation
1920s 15.2% 6.0% 11.8% -0.9%
1930s 0.2% 4.9% 3.7% -2.0%
1940s 9.0% 3.2% 7.0% 5.4%
1950s 19.2% -0.1% 11.4% 2.2%
1960s 7.7% 1.4% 5.4% 2.5%
1970s 5.7% 5.5% 5.9% 7.4%
1980s 17.4% 12.6% 15.9% 5.1%
1990s 18.1% 8.8% 14.5% 2.9%
2000s -1.0% 7.6% 3.0% 2.5%
2010s 12.7% 6.1% 10.5% 1.8%
2020s 6.1% 1.5% 4.6% 2.0%
(expected)
Source: HSBC Global Asset Management, HSBC Private Banking, Refinitiv Datastream, University
of Lausanne, as at 4 December 2019.
14Equity market valuations are not yet at record levels Fixed income
20 Following substantial rate cuts and
Developed Markets Emerging Markets repricing over the last twelve months, fixed
income investing is becoming particularly
challenging. Low yields and tight credit
spreads form an unfavourable starting
price / earnings ratio
15 point for future returns. Markets may
be overly pessimistic on future growth
and may be overextending the period
of inflation below central banks’ targets.
As a result, any pickup in bond yields
10 or inflation later in the decade may lead
to negative real returns for government
bonds. This is something that investors
have not seen over the last fourty years,
but was not unusual in the preceding
5 fourty-year period from 1940 until 1980.
2004 2006 2008 2010 2012 2014 2016 2018 2020 In fact, it can be argued that the recent
Source: HSBC Private Banking, Refinitiv Datastream, as at 4 December 2019. experience has been anomalous and not
repeatable in coming decades.
Equity markets price / earnings ratios in coming years if
We expect equities to outperform fixed rates remain low. And if inflation were to Government bonds have been the best
income, and to a greater degree than increase somewhat because of higher diversifying asset class in recent history,
when we calculated our forecasts in fiscal spending and tight labour markets, with substantially negative correlations
the past two years. In 2019, equities nominal equity returns are likely to benefit with equities and respectable overall
experienced a brief melt-up in January and relative to bond returns. returns. However, due to our very low
rebounded from the sharp correction in expected returns, we now increasingly
May, but have remained fairly volatile and We continue to consider emerging market seek diversification through private
directionless since, amid escalation of the equities as more attractive than their markets, un-correlated hedge fund
US-China trade tensions and deteriorating developed market counterparts, with an strategies and gold.
manufacturing activity across the globe. expected return of 8.7% p.a, largely due
Meanwhile, bonds saw an impressive to greater economic and earnings growth In investment grade, the credit quality
rally, as central banks around the world potential. We also see opportunities in deteriorated somewhat over past years
delivered a number of unexpected interest Private Equity, where the ability to access as issuers took advantage of very low
rate cuts, but equities’ price / earnings a broader opportunity set and use capital yields, while they also borrowed at longer
ratios remained relatively constant. We more efficiently leads us to expect returns term than previously, extending the
thus foresee some further upside for of 9.1% p.a. for the median manager. overall duration of the market. With lower
yields and higher intrinsic risks, investing
Government bond yields are low on an absolute basis, and relative to cash rates for income is particularly challenging,
as we discuss in our portfolio strategy
20% Long-dated bond yield Cash rate
section. For the long run, we still see a
18%
reasonable amount of yield pickup in
selective high yield, and especially in EM
16%
local currency debt market, where our
14%
expected returns are 3.6% p.a. and 6.9%
12% p.a., respectively. A selective and tactical
10% approach to fixed income is needed to
8% find the best risk/return trade-off, and it is
clear that a simplistic 60% equities / 40%
6%
governments portfolio composition is not
4%
appropriate for the decade ahead.
2%
0%
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: HSBC Private Banking, Refinitiv Datastream, University of Lausanne, as at 4 December
2019. Past performance is not a reliable indicator of future performance.
Investment Outlook First Quarter 2020 15Themes
1. Investing in a low yield world
Low bond yields are often seen as a small pickup in yields if a trade deal or a central bank cuts (see our EM theme for
the market’s way of expressing its pickup in fiscal spending in Europe were more details). We also see opportunities in
dissatisfaction with the economic outlook. to lift global economic growth somewhat, developed market financial bonds, across
But even negative safe haven yields do but any such pickup should be small. the capital structure, in spite of relatively
not necessarily imply a recession. The We also acknowledge that globalisation full valuations.
low bond yields that many investors are has probably passed its peak, and
struggling with, are more structural than protectionism could lift inflation a bit, but Dividend stocks are attractive in a low
cyclical in nature. the impact on bonds should be small. yield world, with dividends exceeding
Treasury yields in the US and exceeding
Bond yields have been on a declining In this low rate and low yield environment, IG bond yields in Europe. When economic
path for decades, suggesting that much the risk is that investors opt for cash growth is slow, it is important to select
of the moves are structural. Inflation is holdings or very low rated high yield companies that can sustain or grow their
structurally low, allowing central banks bonds. We think either would be a dividends. For example, financials often
to keep interest rates low. At the same mistake, as cash in developed markets pay high dividends, but have a cyclical
time, global ageing and the Chinese is bound to generate low returns, while business model. Most often, though,
savings surplus create demand for global low rated high yield spreads are too tight, companies paying high dividends have a
bonds, and we find it hard to see how in our view. Moreover, it would be overly relatively a-cyclical business model, with
these trends can reverse any time soon. prudent to sit on cash if, as we believe, the utilities being a good example.
Of course, quantitative easing (QE) has US is not going into recession.
played a role in bringing yields down since Looking for companies with sustainable
the financial crisis. But the trend of lower Instead of holding cash or low rated dividends is just one way to increase
bond yields had started well before the high yield (the two extremes of the risk portfolio income and resilience. We also
crisis hit. And while QE was scaled back spectrum), we continue to see a better believe that looking for ‘quality stocks’
in recent years, Japan continues with it, risk / return trade-off in USD investment more generally can be a good idea in
the ECB has restarted it and the Fed is grade credit. We also prefer it over EUR this low growth and low yield world.
expanding its balance sheet for liquidity or GBP credit given the yield differential. The quality label can be defined in many
reasons. The risk that central banks sell Emerging markets hard currency and ways but we specifically like companies
safe haven bonds and cause corporate local currency bonds provide an attractive with high and stable profitability, and
and EM markets to significantly re-price, pickup in our view, and we believe that manageable leverage.
thus seems low. Of course, there could be EM local currency bonds will benefit from
Finally, low yields should help gold, which
typically rallies if real bond yields fall.
Amount of outstanding bonds with negative yields We sympathise with investors who find
it hard to buy safe haven bonds with
18 negative yields, and we believe that many
will find that gold can be an attractive
16
alternative diversifier.
14
12
USD trillion
10
8
6
4
2
0
Dec-10 Dec-12 Dec-14 Dec-16 Dec-18
Source: Bloomberg, HSBC Private Banking as at 4 December 2019. Past performance is not a
reliable indicator of future performance
162. Sustainable investing
A lot has been written about ESG scores may result in a quality bias, too, increasingly want their employer
sustainability. Many articles focus and (depending on the approach) in to have strong diversity rules, fair
on the obvious positives of the lower energy and mining holdings. And promotion practices and sustainable
sustainability story, including the this will of course lead to temporary production processes. So it’s important
clear need for the world to be more underperformance or outperformance, for businesses to take this into account
sustainable and the role investors as any style bias would also do. if they want to attract and retain talent.
can play to incentivise companies to Becoming a more sustainable business
clean up their act. In addition, there also involves costs and investment. Thinking about sustainability can help
is the possibility of attractive returns businesses to anticipate changes in
for shareholders in companies that But rather than looking back to try to consumption patterns or regulatory
develop new services or products calculate historical performance, we changes, and this should allow
that help address the sustainability believe it is important to look ahead. In them to develop new products and
challenge. The World Economic Forum fact, looking at the fundamental drivers services. Those that are ahead of their
has decided to make “Stakeholders for and their outlook is exactly what any competition will benefit, while those
a Cohesive and Sustainable World” its investor would need to do with a who fail to foresee the changes may be
theme for the 2020 Davos meeting. new trend that is so far untested. In slow to innovate, miss opportunities, or
our view, if companies benefit from even become irrelevant and fail.
Other articles take a more cautious behaving in a sustainable way, then
approach, pointing out the relative investors in those companies should Therefore, sustainability matters for
infancy of sustainable and ESG benefit as well, in the long run. And investors too. As one fund manager
(Environment, Social, Governance) this is what we explore in our graphic. told us, “if you don’t incorporate
investing. For example, fund houses environmental, social and governance
have different ways of scoring It is clear that more and more aspects in your stock selection, you will
companies on their ESG scale and consumers want less packaging and miss very important issues”, regarding
their processes are still evolving. This fairer working practices, and that the potential opportunities or the risks
makes it hard to have enough reliable they are willing to take their business to that company’s business. Therefore,
data to prove that investment returns elsewhere if needed. And if clients incorporating sustainability in one’s
using an ESG approach would have put pressure on a company to behave investment strategy is not just about
generated similar, or better returns sustainably, that company will often trying to do good: it is a necessary
than a standard benchmark index. put pressure on its own suppliers to be part of the company analysis and
Clearly, selecting companies with good more sustainable as well. Employees, investment process.
Consumers & supply chain: create loyalty, avoid bad publicity
Employees & community: attract talent
Be sustainable to Products & services: new opportunities
Lower risks Regulators: changes to operating environment
and create new
opportunities Investors: their willingness or ability to invest
Equity analysts: earnings forecasts
Rating agencies: rating and cost of funding
Investment Outlook First Quarter 2020 17Among the three aspects of ESG, many articles find that good governance is the most important driver, with many examples of improved governance boosting corporate performance and investor returns. And an important aspect within governance is the presence of diverse management teams, which tend to perform better. Diversity of thought tends to help generate more ideas, and helps challenge and avoid really bad decisions, which could have been harmful to the business. Another thematic focus for us is our ‘All Electric’ theme, which looks at opportunities related to electrification, including electric vehicles, the related need for batteries, and a flexible electric grid. Renewable energy is now cheaper than conventional energy production, leading to a quick pick-up in solar and wind installations. But as solar power production picks up when it is hot, and falls during winter or at night, the grid needs to be able to quickly redirect the flow of electricity. All of this creates opportunities for the firms involved. And if governments decide to invest more in green energy to boost their economies or to reach the Paris Climate goals, this investment theme could benefit from another strong tailwind. Finally, our Clean Living theme focuses on the investment opportunities in pollution treatment and reduction, water treatment and sanitation, and recycling. The public is increasing galvanised by a combination of social media coverage and personal experience that something needs to change. And technological progress allows companies to develop profitable products and services to tackle this challenge. 18
3. Industrial Revolution 4.0
After a volatile Q2 and Q3 in 2019, payments adoption has surged, driven 5G-related opportunities are the key
the tech sector has fared somewhat by the activities such as ride hailing source of our more upbeat outlook
better lately. Semiconductor and and e-commerce, and mobile wallets for the biggest integrated circuit
biotechnology indices have started to are poised to grow even faster. From makers going into 2020. A large Asian
improve in early October and made USD22 billion in 2019, they will likely semiconductor company for wireless
new year-to-date highs in Q4. Some of quintuple to over USD114 billion communications will offer several 5G
the cyclical headwinds we highlighted by 2025. system-on-a-chip (SoCs) in 2020 and
three months ago may be easing. hopes their gross margins will be better
The China-US trade talks seem to Oncology remains a hot topic in than its overall average. In the US, with
be making some progress, and the biotechnology, and our ‘Future Health’ 5G network launches set to take center
smartphone sales outlook is improving theme. An active research topic stage, we believe 2020 could see a
somewhat due to 5G. In the longer concerns the question why the immune steady rise in competition, a rebound
term, we continue to expect a whole system that helps the body fight foreign in smartphone upgrade rates off record
range of innovations and new disruptive “non-self” cells and pathogens, does lows, increased switching activity, and a
technologies, which provide investors not work on cancer cells. Harnessing wider availability of 5G handsets.
with a wide scope of new investment the immune system’s ability to detect
opportunities, which we group under and destroy cancer cells is the basis of In the US, we continue to think patterns
‘Industrial Revolution 4.0’. This is in spite a rapidly growing stream in oncology of consumption will move from
of some issues such as anti-competitive known as immuno-oncology (I-O), physical shops to online, supporting
practices, personal data protection, and which has more than 1,600 clinical trials our ‘Digital Consumer’ theme, in spite
the challenge of controlling the spread currently registered at the US Food and of the slowdown in the economy in
of misinformation (i.e. ‘fake news’). Drug Administration. Most tumors arise 2020. This change will continue to
from transformed normal cells that have bring a new set of digital opportunities
While Fintech has already taken undergone genetic changes so that they not just in technology companies, but
off in China, parts of Europe and in become carcinogenic but can escape also in traditional sectors like logistics,
the US, strong potential in mobile being seen as harmful by the immune supply-chains and distribution which
wallets and payments can also be system. I-O is about identifying ways are now readying for a future using
found in Southeast Asia. In a report to make the immune system “see” robots, drones, virtual reality and
by Google, Temasek & Bain, out of and eliminate these transformed cells much more. Companies have been
around 400 million adults in Southeast at an early stage. Together with the reluctant to invest much in operations
Asia, only 104 million are enjoying progress in next generation sequencing or additional capacity in recent months,
full access to basic financial services we mentioned in our Q4 edition of the as trade tensions have reduced visibility
(i.e. bank account, bank credit, and Investment Outlook, immunotherapies for their business. But we think any
insurance). One reason for the low offer a means to personalize cancer improvement in the US-China tensions,
banking penetration is cost, because treatment that is also more durable or a stabilization of manufacturing
physical bank branches are expensive. and prone to fewer side effects than sentiment, could encourage companies
Other challenges include the lack traditional cancer therapies. to invest some of their considerable
of identification systems and credit The search for a cure has already cash piles. In the medium term,
information. Fintech has the potential to spurred new diagnostics that can they need to, in order to increase
solve many of these challenges, thanks detect cancers earlier, monitor the productivity from current low
to widespread access to smartphones, patient during treatment, and look for levels, and to keep pace with their
and Fintech firms being able to make disease reoccurrence. competitors that are at the forefront
better credit assessments. Digital of technological innovation.
Investment Outlook First Quarter 2020 194. Seeking EM Structural Growth
Emerging market (EM) assets have all regions and compares to 5.7% globally. contributing 10% of global outbound travel
encountered macro challenges in 2019 We forecast actual consumer spending expenditures. And with just 120 million
due to protracted US-China trade tensions, in Asia ex-Japan to grow by 5.8% in 2020 Chinese citizens (i.e. 8.7%) holding a
the global synchronised slowdown and and 5.9% in 2021, well above the average passport, there is significant upside ahead
geopolitical conflicts. Even if there is a global rate of 2.5% in 2020 and 2.6% for China’s outbound travel.
phase-one trade deal, there is unlikely in 2021.
to be a complete removal of all tariffs Education is another bright spot of Asia’s
in 2020. Hence our investment strategy Asian technology companies should consumption story. India has the world’s
focuses on selective areas of resilience in benefit, as the region remains at the largest population of about 500 million
EM and Asia and on long-term structural forefront of technological innovation in the age bracket of 5-24 years, which
growth opportunities. reshaping consumer behaviour amid presents promising opportunities in the
rising penetration of e-commerce. As education space. India’s education market
The secular drivers of strong personal China spearheads disruptive technological size was worth USD101 billion in 2019 and
income growth, digitalisation of retailing changes across 5G, artificial intelligence, it has become the second largest market
and premiumisation of consumer e-payment, health technologies and for e-learning after the US. In China, 61
demand continue to support healthy Internet of Things, it has become the million school children already attend extra
consumer spending growth across Asia, world’s largest e-commerce market lessons at after-school tutoring institutions,
which forms the basis of our Power of and the number one consumer of and this is growing at an annual pace
Asian Consumer investment theme. smartphones and electronics products. of 10%.
Within the region, we favour the domestic And it is on track to overtake the US
consumption story of China, India and to become the world’s number one In India, reform initiatives such as financial
the ASEAN countries, and the attractive consumption market in 2020. inclusion and digitalization are creating
opportunities in personal services, a wide range of financial services and
e-commerce, high-end consumer In China, the rise of the empty-nesters, new consumption patterns. Modern
goods, entertainment, travel, education, who account for 53% of urban retailers benefit from a rising preference
healthcare and financial services. consumption, is driving strong growth in for modern grocery shopping. Healthcare
travel, entertainment, sportswear, home services see structural demand growth
Bucking the downturn in global trade and refurbishing and footwear. And in 2019, as a result of ageing populations in North
the manufacturing cycle, Asian consumer China released a policy aimed at improving Asia and Singapore. And in emerging
spending has been performing much fitness, enhancing sports-related ASEAN markets, healthcare spending
better than the industrial sector over consumption. Asia’s travel and hospitality should rise, as it is still low compared
the past year. Asia’s massive affluent industry is another growth sector and has to the developed world at around 5%
middle class stands out as an important remained resilient amid global uncertainty. of GDP, well below 10% in Japan and
growth engine. And the Asian consumer It benefits from robust outbound tourism 17% in the US. In India, Indonesia and
continues to rapidly accumulate wealth. across the region, particularly from China. Vietnam, the young demographics and
According to Boston Consulting Group’s Outbound trips made by Chinese tourists rising urbanization rate will boost spending
Global Wealth report, private wealth increased by 14.7% to 150 million in on digital retail, housing, healthcare and
across Asia will rise at an annual pace of 2018 and up 14% to 81.3 million in H1 communication services.
9.4% to reach USD58.2 trillion over the 2019, making the country the world’s
next five years. This is the fastest rate of largest outbound travel market and
20To help manage the challenges from the reserve requirement ratio reductions and monetary easing, supporting our bullish
trade conflicts, we have launched a new corporate tax cuts. We forecast reserve view on the High Conviction Themes of
High Conviction Theme, Shaping a New requirement ratio cuts of 150bp and a Asian Credit Opportunities and EM Debt
China, which captures structural growth 30bp reduction in Loan Prime Rate before with Focus on Carry. Generally resilient
opportunities from China’s economic the end of 2020. The government will likely domestic fundamentals, structural growth
transformation and beneficiaries of policy double down on its support for the private potential and central bank easing are all
stimulus. The US tariffs and sanctions sector to stabilise domestic growth. supportive drivers for EM and Asian hard
have led Beijing to rethink its strategic Hence, we continue to seek opportunities currency and local currency bonds. We
positioning in the global technology in selective Chinese financial and domestic favour local currency bonds in China,
supply chain. We note that the technology consumption stocks exposed to policy Indonesia, Brazil, Mexico and Russia and
sector is the single largest part of China’s easing, increased infrastructure spending, hard currency credit in China, Indonesia,
imports (21% of total imports in 2018), 5G and technological upgrading. South Korea, Brazil and GCC due to their
with semiconductors accounting for 70% attractive yield pick-up relative to DM
of this. There are rapid structural reforms taking credits, and supportive central banks’
place. China is committed to opening its policies. Technically, we expect EM and
With national security, supply chain financial markets to foreign institutions Asian corporate bonds to attract inflows
stability and intellectual property in mind, in 2020, in part as a response to trade from yield seeking investors around
China is investing heavily in R&D to conflicts, but also for its own development the world as they reallocate from their
strive for more independence in critical needs. Foreign ownership limits on negative yielding debt markets into higher
technologies and upstream components. banks have been removed, and those yielding assets.
In particular, China’s semiconductor for insurers and asset management
companies are racing to make chips at companies will be removed in phases in Many EM and Asian central banks are
home. They are also rapidly adapting to 2020. Through a local acquisition, a US expected to ease monetary policy further
accommodate the rollout of 5G, slimmer firm this year became licensed to provide in 2020, helping to stretch out the current
smartphones, and burgeoning chip digital payment services in China. Beijing economic cycle, and thus limiting default
demand for autonomous driving. is also improving the funding environment risks. Some Asian credits often offer
We don’t think the trade tensions will through the launch of a new Science higher yields than their developed market
stop China from investing heavily in and Technology Innovation (STAR) Board counterparts with similar credit metrics,
technological innovation and R&D, as it and is planning another new Technology suggesting that there are still compelling
is determined to reduce its reliance on Board in Shenzhen. We favour companies relative value opportunities in Asian credit.
foreign technology. We find attractive which will benefit from the government’s Taking into account latest accelerated
opportunities in China’s newly emerging preferential policies to support the rate cuts by the People’s Bank of China,
technology companies which will benefit development of the Greater Bay Area we stay bullish on Chinese hard currency
from the more proactive monetary and and Shenzhen under its new role as the and local currency bonds, and selective
credit policies to support technological nation’s “pilot demonstration area for Chinese bonds issued by quality SOEs
innovation and industrial upgrading. socialism with Chinese characteristics”. and high yield bonds issued by selective
Chinese property developers.
We expect the Chinese government Amid low global cash rates and bond
to further step up monetary and fiscal yields, EM and Asian central banks are
stimulus through Loan Prime Rate cuts, expected to stay dovish and offer further
Investment Outlook First Quarter 2020 21Equities
We hold a neutral allocation to the polls could lead to two-way volatility. meantime, we position in quality stocks
equities amid supportive central bank In addition, global economic growth with sustainable earnings, to weather any
policies, but challenges to corporate and trade flows are weaker than normal volatility in the macro data, and in dividend
margins and geo-political headline and corporate margins are under some stocks, to generate some income in a low
risks remain. pressure. The policy response continues to bond yield environment. We also worry
be dependent on just one engine (central that consensus expectations of continued
We favour the US over Europe, and bank accommodation) while markets margin growth are overly optimistic, as,
focus on quality and dividend stocks are still waiting for any tangible signs of in fact, margins are already declining,
in the current low growth and low broad-based fiscal support. as shown in our graph. Companies
yield environment. We hold a neutral with strong brand names, and effective
view on China and focus on areas But while it may be difficult to match the operations, logistics and marketing should
with structural support. 2019 performance, global equities should be more resilient to any margin pressure.
still be up in 2020, as monetary policy Often, these are the companies that make
The year 2020 on the Chinese calendar support remains in place and should limit the most of the technological innovations.
is the year of the metal rat. It is supposed any material sell-off. Price/earnings ratios
to be a year of new beginnings, new are not overly stretched, and risk premia It is likely that tech will remain responsible
opportunities, love, and money. After a could come down somewhat when trade for much of the long term growth and
year filled with uncertainty and volatility, negotiations advance further. With organic efficiency gains. Investors who get
many global investors would no doubt growth weak and interest rates low, caught up too much in the vicissitudes
welcome a new year filled with new corporate M&A should remain a positive of the business cycle run the risk of
beginnings. But it seems that the one factor. And high corporate cash balances forgetting some of the secular themes
factor that should continue to test equity should allow for corporate stock buyback that may propel productivity and equity
markets is the political calendar. The year programs to continue to be a tailwind for market performance in 2020 and beyond.
begins with the possibility of a Brexit deal, stock markets throughout the year. Deployment of 5G, for example, will
followed by elections in Taiwan, Korea, expand connectivity across the globe,
Hong Kong and possibly also in Singapore, But the upside is unlikely to be uniform, and enable other technologies like
and ends with the US Presidential with the US better placed than Europe, the driverless car, and an explosion
election. While it is true that historically and cyclical sectors likely to underperform of interactive content and media. We
equities have performed well during US until there is better news on trade continue to see opportunities in digital
Presidential election years, any changes in or increased fiscal spending. In the consumption around the world, and
in other structural growth themes (see
themes section).
The US has been the strongest equity market, but all equity markets
outperformed cash in the year to date
The US Hopefuls
Cash US Europe ex UK UK The US equity outperformed most
130
other markets in 2019, especially when
EM Asia EM Latam EM EMEA performance is measured in a common
125
currency. And while the trade dispute
120
has slowed trade flows, manufacturing
and investment spending, US economic
115 and equity market fundamentals still
look resilient. This is largely because
110 of a strong consumer outlook, with
the unemployment rate near 50-year
105 lows, wages rising at more than a 3.0%
annualized rate, interest rates to be on
100
hold, and inflation in check. All those
factors point to continued solid growth in
95
Dec-18 Feb-19 Apr-18 Jun-19 Aug-19 Oct-19 consumer spending in 2020. We believe
the Fed will remain on hold throughout
Source: Bloomberg, HSBC Private Banking as at 4 December 2019. Past performance is not a
2020, and this should provide some
reliable indicator of future performance. stimulus to the interest rate sensitive
sectors of the US economy, especially
housing and autos.
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