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Great Expectations – Markets Ahead of Reality? Investment Outlook Second Quarter 2021
Contributors
Global Chief Investment Officer
Willem Sels
willem.sels@hsbcpb.com
+44 (0)207 860 5258
Global Investment Strategist,
Managing Editor Head of Asset Allocation
Neha Sahni Stanko Milojevic
neha.sahni@hsbcpb.com stanko.milojevic@hsbcpb.com
+44 (0)20 7024 1341 +44 (0)20 7024 6577
Regional Chief Investment Officers
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 2899 8691 +65 6658 3885
CIO of Wealth Management and
Global Head of Research and Insights Global Head of Equities
Xian Chan Kevin Lyne Smith
Xian.chan@hsbc.com kevin.lyne-smith@hsbc.com
+44 (0)20 7991 9198 +44 (0)207 860 6597
Global Head of Fixed Income Senior Fixed Income Credit Specialist
Laurent Lacroix Elena Kolchina
laurent.lacroix@hsbcpb.com elena.kolchina@hsbcpb.com
+44 (0)207 024 0613 +44 0207 860 3058
Global FX Coordinator Head of Sustainable Product Offering
Nicoletta Trovisi Sophie Haas
nicolettatrovisi@hsbc.com sophie.l.haas@hsbcpb.com
+44 207 005 8569 +44 (0) 207 024 0283
Global Market Analyst, Real Estate Investment Global Head of Hedge Funds
Guy Sheppard Richard Berger
guy.r.sheppard@hsbc.com richard.berger@hsbc.com
+44 (0)207 024 0522 +44 (0) 203 359 6139
Senior Product Specialist |
Private Market Investments
Jorge Huitron
jorge.emilio.huitron@hsbc.com
+44 (0) 203 359 7040
2
Contents
Letter to clients 05
Portfolio Strategy 06
Updating our Strategic Asset Allocation
for the recovery and beyond 10
Top Trends for 2021
1. Recharging Asia’s Growth 14
2. Recovering in a Low Yield World 18
3. Digital transformation 20
4. Investing for a Sustainable Future 22
Equities24
Fixed income 26
Currencies and commodities 30
Hedge funds 32
Private markets 34
Real estate 36
Disclaimers38
Investment Outlook Second Quarter 2021 3
Click below to watch our video Click below to watch our video
Portfolio strategy – comparing market views Three high conviction themes for
with our own convictions Q2 and beyond
4
Welcome
Dear client
When we published our 2021 investment So, our ‘volatile but still low’ bond yield after lockdowns end. The digital revolution
outlook, we titled it ‘Recovering and outlook stands. If inflation rises in Q2 as well as the sustainability revolution are
Rebuilding’ as we looked ahead to an but then falls back, and central banks’ structural in nature, and form the basis of
improving economy, steady progress in the policy normalisation is only very slow, the two of our main trends for 2021. We are
fight against the pandemic, and improving recent upward move in Treasury yields is only at the very start of the sustainability
earnings. We took a bullish view on equity exaggerated, and inflation expectations revolution, and investors should not be shy
markets and were forecasting volatile but (breakevens) should fall back. The more to price in impressive earnings growth.
still low bond yields, and a stable interest important component to watch are real For investors who are worried about the
rate policy in G10 countries. yields, which have risen but for now valuations of some of the relatively rare
remain very low. Central banks will try to ‘pure play’ sustainability firms, we point
Markets have been looking ahead as well. keep them low, because when they last out that many traditional companies have
The equity rally and outperformance of shot up sharply during the 2013 Taper growing sustainable activities. It makes
cyclical stocks suggest that they are willing Tantrum, equities, credit, gold and other sense to look for some of those companies,
to price in future earnings growth already assets dropped. They do not want financial and integrate sustainability not just in the
now. That could feel odd to some people conditions to tighten, until the economy is satellites but also in the core portfolio.
whose country is still in lockdown mode, on a much better footing.
or to owners of a business that remains In tech and sustainability, we look for
closed. But we think the market is right We thus position for improving growth opportunities around the world. Asia has
to be positive. Mortality and infections and earnings, for a short term pickup in a strong and growing tech sector, and
have dramatically fallen in countries where inflation and bond market volatility, but also China has put sustainability at the heart
vaccinations are well progressed, and for return to lower and more stable bond of its five-year plan, as part of its ‘quality
a pickup in consumption thus seems a yields later in the year. We think the best growth’ strategy. The improvement in
question of when rather than if. Till then, way to do this is to invest for the positive global manufacturing is helping Asian
fiscal policy will provide a partial safety net. 6-12 month market outlook, but to manage markets as well, and local consumption
the potential for short term volatility. We is picking up. Together, these factors are
So far, so good. But markets worry that therefore maintain an overweight in global recharging Asia’s growth, and we see
this cyclical recovery and fiscal stimulus equities and cyclical sector exposure. Given many opportunities in the region’s stock
will lead to inflation. In the short term, they low cash rates, we also maintain a solid and credit markets.
are right. Improved demand may lead to weight of carry assets (investment grade,
bottlenecks and price increases in some high yield, and emerging markets bonds) In our investment outlook brochure and
areas where supply is slow to pick up. Oil and have added to dividend stocks. We videos, we discuss these views and
prices have also risen compared to last manage rate-driven volatility by diversifying opportunities in more detail. In spite of the
year, which should boost inflation until the and managing duration in bond portfolios, run-up in equity valuations and increased
end of Q2. But we think markets are wrong and by maintaining overweights to rate volatility, the best strategy is to remain
to price in higher inflation for the longer financials and materials in equity portfolios. invested in well diversified portfolios, as we
term. Labour markets have become even In Q2, USD may remain volatile, gold anticipate a healthy balance of improved
more global and competitive, with many may be directionless but still an important earnings and still low rates for the rest of
of us working online through Zoom or diversifier, and hedge funds should have a the year.
Teams. Technology also continues to act strong opportunity set.
as a deflationary force. So, central banks
do not feel threatened by the short term Rate volatility has led some investors away
rise in inflation, and they intend to keep from growth stocks into value stocks, but
policy rates unchanged. Tapering of bond our low rate view should provide them
purchases should be very slow and well with some comfort. We have broadened
telegraphed, probably starting with the Fed sector exposure into other sectors as the Willem Sels,
in December. economic recovery broadens, but fleeing Global Chief Investment Officer
from tech is not rational. Tech earnings are
solid and should continue to be so even 23th of March 2021
Investment Outlook Second Quarter 2021 5
Portfolio Strategy
Markets naturally anticipate, but in look forward, to the economic reopening, to spend on things like entertainment
the following pages, we examine how and we thus think the market is right to be and travel, and many shops were
markets currently see the world, and optimistic. closed. Consumers also increased their
whether they are right to do so, or are precautionary savings as they felt more
going too far in their anticipation. In fact, the move in US equity markets is uncertain about the future. These savings,
in line with the greater optimism we see renewed optimism and the end of the
Topic 1: A broad-based in business surveys, both in its timing and
its amplitude. The Q4 earnings season has
lockdowns, as vaccines get rolled out,
should lead to a significant jump
economic recovery delivered a solid set of positive surprises, in consumption.
and some more positive guidance about
The sharp equity market rally from the
the future. It is clear that there is still a lot of
March 2020 lows is due to many factors,
uncertainty about the speed of the vaccine
but it is clear that it wouldn’t have
Our economists also foresee a relatively roll-out. But the recent fiscal support
happened if markets are not confident
sharp and broad-based pickup in packages in the US, UK, China and other
about the economic recovery. A look at
economic activity. Government spending countries illustrate that governments
sector performance also illustrates this
and construction activity are ongoing. are there to provide a safety net, helping
confidence: cyclicals have outperformed
Global manufacturing is accelerating, with households and SMEs to bridge the
defensives.
higher orders and low inventories painting time between now and the economic
an optimistic picture in many countries. reopening. In our view, this should allow
This may seem odd to some readers,
What will really move the dial in months markets to continue to look forward, to the
especially to many clients who are
ahead, however, is consumer spending. better times ahead.
business owners and still face challenging
Lockdowns limited the consumers’ ability
conditions currently. But markets tend to
What it means for our From a style factor perspective, many It is also customary to look for high
clients typically focus on large cap quality stocks, to ride out economic
investment strategy stocks, either by choice or because and market cycles. Our confidence in
We agree with the market’s bullish they are most present in benchmark the economic recovery has caused us
assessment of the economic cycle. It indices. We have added some selective to close our satellite investment theme
supports our overweight position on exposure to small and midcap stocks, related to quality. In an improving
global equities and on cyclical sectors, because such stocks are often strong economy, we think the way to look at
including for example industrials, beneficiaries of a recovery in the local quality and resilience is more structural,
materials and financials. economy. i.e. we try to pick the stocks that are well
positioned for the future – notably for the
Our country picks also reflect our digital and sustainability revolutions.
cyclical preferences. China’s economy
should grow at an impressive 8.5% rate The outperformance of cyclical sectors illustrates the market’s cyclical
this year, with a focus on quality growth. optimism
We like the Chinese digital consumption,
technology hardware, high-end 150 Cyclical / Defensives performance ratio
manufacturing, electric vehicles, and 140 US Europe
materials sectors, which should benefit 130
rebased to 100
from the government’s policy priorities. 120
Strong semiconductor and tech activity
110
should benefit South Korea, while rising
Asian and global growth is a positive for 100
Singapore. We also have an overweight 90
position in the US and the UK, where 80
the vaccine roll-out is well advanced 70
compared to the EU. Elections in Mar-17 Mar-18 Mar-19 Mar-20 Mar-21
France and Germany could be a risk to
investment sentiment later this year. Source: Bloomberg, HSBC Private Banking as at 23 March 2021. Past performance is not a reliable
indicator of future performance.
6
Topic 2: Market fears of year, and it so happens that oil collapsed the bond markets’ forward rates). We
last year. These base effects, however, continue to believe that inflation is kept
higher inflation should be temporary, allowing CPI to structurally low by many factors. Global
Markets’ positive view on the cycle also peak around April or May, and then come labour markets, low unionisation rates
naturally puts some upward pressure on down again. and the growth of the gig economy are
bond yields. In part, this is because bullish probably the main drivers. The pandemic
There is also some growing evidence has caused even bigger parts of the
equity markets imply less safe haven
of supply bottlenecks in manufacturing, economy to move online, and as we work
demand for Treasuries. But the move is
as inventories are low and companies through Zoom or Teams, it is clear that
principally driven by fears that stronger
restart. Consumers may also rush to the many jobs can increasingly be done from
activity and higher fiscal spending will lead
shops and try to board the same plane anywhere in the world. This creates more
to higher inflation.
to Mykonos or Phuket, leading to higher competition in the labour market and
On this point, we only partially agree with prices. But again, the effect should be should keep wage inflation low. Without
markets: we think inflation will rise, but temporary. There is still a lot of spare higher wage inflation, we do not think CPI
only mildly and temporarily. Contrary to capacity in the economy, and many inflation can drift up for long.
markets’ fears, we think inflation remains companies do not have the pricing power
structurally low. to charge through higher input costs to Much of the generous fiscal spending
their customers. So again, we think this in many countries should not lead to
The short term upside we foresee for CPI effect will be temporary. inflation, as the support for households
is due to the oil prices, which have risen and SMEs often simply offsets a fall
on better demand, and a remarkably So it is odd to us that the market has in their income. From a longer term
high compliance to production quota not only pushed up its assessment of perspective, more fiscal spending now
by OPEC+ producers. Inflation always near-term inflation, but also that of inflation means higher debt, and therefore less
compares today’s prices with those of last 5-10 years from now (we can see this in spending (or higher taxes) later.
What it means for our clients, and cash rates are unlikely to The US dollar is likely to remain volatile,
rise any time soon. Central banks will as a result of the volatile US bond yields.
investment strategy try to avoid any excessive bond market The low US rate environment, and
We position for short term volatility in volatility, which should comfort bond positive outlook for risk assets may lead
inflation and bond markets, but a return investors. Our search for yield thus to some further weakness of USD, but
to lower inflation and bond yields later continues in investment grade, high yield we think the downside potential is now
this year. and emerging market hard and local much more limited, following the fall we
currency bonds. have already seen.
We manage this short term volatility by
diversifying bond portfolios, keeping We think the market is pricing in
bond duration in check, and by excessive long term inflation, which
incorporating some positions – such as leads us to be underweight in TIPs
financials stocks – that can benefit from (Treasury inflation linked securities).
higher rates. Oil and supply side bottlenecks may lead to short term inflation
Bank stocks also have another benefit, 100 Manufacturing price PMI index WTI Crude Oil (USD/bbl)
i.e. that dividends are now on the rise,
after being cut sharply last year. The 80
improving economy leads to higher
lending volumes and should reduce loan 60
losses, and several regulators are easing
the restrictions on dividend pay outs and 40
share buybacks
20
This is welcome, as we remain in a 0
structurally low yield world. Even after Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
the recent move in Treasury yields, they
remain unattractive for most of our Source: Bloomberg, HSBC Private Banking as at 23 March 2021. Past performance is not a reliable
indicator of future performance.
Investment Outlook Second Quarter 2021 7
Topic 3: Market concerns recent earnings season did deliver a high We now expect the Fed to start tapering
number of positive surprises. Global in December, but gradually, and with very
about high valuations business surveys also suggest earnings clear guidance. The market should be less
Price / earnings ratios are high relative to optimism for the future, and we note that surprised by this in 2013, and the move
history, and this is causing some investor the equity market performance is in line in real yields should be less pronounced.
concern. It has led to temporary episodes with the ISM performance. As a result, we foresee only a mild drop
of profit taking over the past 12 months. in Price / Earnings ratios, which, given the
Of course, valuations are also supported strong earnings growth, is still compatible
And as valuations are typically highest in
by very generous global central bank with high single digit equity market
technology and other growth stocks, it has
liquidity, and by the low rate environment. performance till year end. Needless to say,
also led investors to rotate out of growth
When we compare US P/E ratios to the US we closely watch the real yield.
stocks into value stocks.
BBB-rated bond yield, we do not find that
But how high are valuations really? the equity market is overvalued. That said, Lastly, some heavily shorted stocks have
Mathematically, price / earnings (P/E) bond markets could pose a risk to equity seen very sharp erratic moves when retail
ratios can be high when earnings are market valuations, if yields rise further, or investors started to buy them, with the
low. So, trailing P/Es (which look at the equity investors start to demand a higher upward momentum driving more inflows
earnings of the past year) will be boosted risk premium over bonds as a result of and causing the price to spiral (first up,
by last year’s earnings recession. Even macro-economic and policy uncertainty. then down). For now, this affects a small
forward P/Es (which look at the estimated part of the market, but if it spreads and
More than inflation, it is tapering of causes equity markets to become more
earnings of the next 12 months) may be
bond purchases that could be the most erratic, investors would start to price in
pushed up if analysts’ earnings estimates
significant risk to equity valuations. In higher risk premia.
are lower than those markets are trying to
2013, markets were surprised by the Fed’s
price in. So, much will depend on whether
tapering, and this led to rising real yields,
companies deliver on earnings, and the
and a correction in equity markets.
What it means for our value, because some cheap companies Equity market valuation concerns
may be value traps, if their business may well continue to lead to some
investment strategy model is not adapted to the digital and temporary corrections, which investors
We see no obvious mispricing of equity sustainability revolutions. will be able to exploit through volatility
markets as long as real yields do not strategies. Given our core views of
We are also wary of chasing structurally low yields, strong global
spike further, global liquidity remains
momentum for the sake of it. While liquidity and an ongoing recovery,
ample and the global recovery remains
sharp flow-driven upside can be we would see such corrections as
in place. As a result, we maintain our
tempting, it will be followed by sharp medium-term buying opportunities.
equity market overweight.
falls if the price becomes divorced from
However, since mid-2020, we have put company fundamentals.
more emphasis on relative valuations.
We have broadened our sector exposure
as tech is indeed highly valued relative Equity market valuations are high relative to history
to other sectors. This rotation is made
easier by the fact that the fundamental 35 US Emerging markets
outlook of other sectors has improved.
30
Price/Earnings ratio
Within sectors, there is a large 25
dispersion in valuations between stocks.
20
Stock pickers, active fund managers
and hedge funds are able to capitalise 15
on this.
10
The broadening of our sector exposure 5
also means that we see opportunities Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
in both growth and value styles. We Source: Bloomberg, HSBC Private Banking as at 23 March 2021. Past performance is not a reliable
do not have an outright overweight on indicator of future performance.
8
Topic 4: together with technology. This led to Comparing valuations of tech companies
correction in early March in both areas, with those during the dotcom period
Tech and Sustainability; when the spike in bond yields caused does not really make sense, in our view,
Sustainability and Tech growth stocks to suffer. as most of the big tech firms make huge
profits now. And those that benefited from
We like to draw some parallels between As we have stated, though, we think bond the pandemic are not immediately going
technology and sustainability. yields may remain volatile, but should to see a sharp fall in profits: many of the
eventually stabilise and come back down. changes to the economy and the way we
For a start, both the digital revolution and So while there is the potential for volatility live are probably permanent, so the digital
sustainability are two of our top trends in growth stocks, we think there are plenty economy will continue to grow its share of
for investors. of opportunities for investors with a 6-12 GDP in coming years.
month (or longer) view. We thus see the
Secondly, technological advances often March correction as a buying opportunity. For companies active in areas related to
enable us to move to a more sustainable sustainability, we think the revolution has
world. For example, the increased mileage The valuation of growth stocks is even only just started. To get an idea of the
potential in batteries makes electric more dependent on the short and long sheer size of investment and change that
vehicles more attractive, and the falling term earnings outlook than for other is needed, one just needs to look at the
cost of solar and wind power makes it stocks, as investors’ assumptions vary US CO2 emissions since 1800, and how
economic to switch to green energy. It is wildly for many of those companies. On we need to make a complete U-turn. So,
interesting to note as well that some of future earnings, we would be careful companies that tap into this investment
the largest tech companies are now the not to be too conservative, as the digital and demand should see plenty of scope
biggest corporate buyers of clean energy. revolution and sustainability revolutions to grow their earnings, now and in the
provide very significant earnings long term.
The market is putting some of the green growth potential.
stocks in the ‘growth stocks’ camp,
What it means for our energy; and some industrial companies done in the core portfolio, the total
have growing green hydrogen activities. exposure to the sustainability theme
investment strategy will quickly add up, and it may be a
By differentiating between ‘traditional’ good complement to exposure in the
Valuation concerns often focus on the
companies on the basis of these thematic satellite.
large cap US stocks in technology,
activities, investors can build up more
and on the pure play firms in areas of
exposure to sustainability. If this is
sustainability.
In technology, we diversify beyond the
The tech sell-off spilled over in sustainability, but we think this is temporary
large US names, by looking for smaller
stocks, opportunities in Asia, and 400 Nasdaq Clean energy
tech-related companies in other sectors
(health technology, automation, 5G). 350
300
As for sustainability, the number of
large quoted companies that are pure 250
rebased to 100
plays, is limited, and hence, fund-driven
flows into such stocks naturally drives 200
up their price. Although future earnings
potential may warrant that high stock 150
price, we think investors can diversify
100
into companies that are not pure
plays, but have growing activities in 50
the sustainability area. Traditional car
companies have different levels of 0
activity in electric vehicles; some utilities Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
are more advanced than others in green Source: Bloomberg, HSBC Private Banking as at 23 March 2021. Past performance is not a reliable
indicator of future performance.
Investment Outlook Second Quarter 2021 9
Updating our Strategic Asset
Allocation for the recovery
and beyond
Since our last SAA update in April Opportunities for counter-consensus We have reduced our previous
2020, valuations have risen sharply asset allocation tilts have thus sizeable position in high yield
across risk assets, thus implying moderated, and our SAA composition credit, adjusting to a barbell strategy
lower potential for total returns in the moves closer to the market consensus. between equities and high quality
years ahead. We prefer equities over fixed income bonds. To broaden our opportunity
and continue to prefer emerging over set, we further diversify our portfolios
developed markets. by adding corporate emerging market
debt, inflation linkers, and securitised
investment grade bonds to our SAA.
Our last SAA update took place in April reassurance needed to begin to re-balance More recently, government bond yields
2020, in response to extraordinary market their portfolios. As the year went on, the jumped and global stock markets
reaction to the global COVID-19 pandemic. long-term outlook continued to brighten extended their rally on the back of
At that time, extreme market volatility and from a very grim starting point, further enduring improvements in the outlook for
a sell-off in credit markets led to a violent supporting risk assets. the post-COVID economy.
widening of credit spreads. Relative to our
assessment of the outlook for defaults Credit spreads widened substantially in Q1 2020 but quickly narrowed over the
and downgrades, elevated credit spreads course of the year
presented a substantial carry opportunity, bps
motivating a move towards high yield 2500
and investment grade credit in our SAA. AAA AA A BBB BB B
Importantly, re-balancing to new strategic
weights also meant reducing the allocation 2000
from assets that had appreciated
sharply, such as government bonds, and
increasing our allocation to assets that had
1500
sold off, such as equities.
Over the subsequent ten months, risk
assets staged an extraordinary and an 1000
almost uninterrupted march higher, driven
by a transition from a pervasive fear of the
unknown towards a constructive outlook 500
for the future. While the consequences of
the pandemic and lockdowns across the
globe were very hard to predict and price, 0
2005 2010 2015 2020
the extraordinary policy response that
promptly took place gave investors the
Source: HSBC Private Banking, Refinitiv Datastream, March 2021. Past performance is not a reliable
indicator of future performance, 23 March 2021.
10Lower and flatter Capital Market Line
Following the accelerated run-up in yields. This is currently keeping the
valuations since April 2020, expected left-hand side of the capital market line
returns across global markets are now somewhat anchored. Secondly, expected
inevitably lower than they were. This is returns are now notably less dispersed
particularly pronounced for asset classes around the CML than they were back
that are higher on the risk spectrum, in April 2020. And lastly, the ongoing
resulting in a flatter Capital Market Line tightening of credit spreads has led to
(CML), as we show below. diminishing opportunity in high yield
credit, on a risk-adjusted basis – relative
At the lower end of the risk spectrum, we to a more traditional combination of
are observing a gradual re-emergence of government bonds and equities.
the inflation risk premium in US Treasury
Expected returns are lower, Capital Market Line is flatter, and expected returns
are closer to fair levels
10% April 2020 PE
9% EME
EMD_L
8%
7%
Expected Return
DME
6% PD
HYD
EMD_H RE
5%
4%
HF Com
3% SIG IG
2%
Infl
1% Cash
Gov
0%
0% 5% 10% 15% 20% 25% 30%
Volatility
10% January 2021
9%
8%
7%
Expected Return
PE
6% EMD_L EME
5%
Com
4% DME
RE
EMD_C
3% HF HYD
2% SIG PD EMD_H
Infl
1% Cash
Gov
IG
0%
0% 5% 10% 15% 20% 25% 30%
Volatility
Source: HSBC Asset Management, HSBC Private Banking, Refinitiv Datastream, 23 March 2021.
Investment Outlook Second Quarter 2021 11Changes to our SAA
Taken together, these changes in our With fewer opportunities to deviate we are also adding securitised investment
long term market outlook imply less substantially from consensus, and given grade bonds as a part of the defensive
pronounced mispricing opportunities the low yield and spread environment, we bond allocation. Both of these asset
between asset classes, and therefore are further diversifying our portfolios to classes have different exposure to interest
motivate a reduction of some of our capture previously untapped sources of rate risk compared to nominal government
existing counter-consensus positions. returns. Due to continued improvements bonds, and as such allow us to have a
Most notably, our annual re-optimisation in liquidity and size of the emerging better diversified defensive building block
results in an unwinding of high allocations market corporate debt universe, we are in the world of low interest rates.
to high yield credit, relative to equities and now confident in a strategic case for
defensive fixed income bonds. In other this asset class. We expect emerging In our table below, we show how we
words, our SAA is now adjusting from market corporate debt to deliver better think about asset allocation, which is
a “bullet” to “barbell” positioning, with risk adjusted returns compared to hard not a simple one-dimensional list, but is
an overarching tilt towards equities. We currency debt issued by emerging formulated along four sources of risk. We
continue to have high allocations market governments. also show that alternative assets such as
to emerging market equities and debt hedge funds and private markets should
relative to consensus, though the size of We are also adding inflation linked bonds not be considered as asset classes, but
these position is now also lower than in to the mix, after allocating to this asset as a different way to liquid equity and
previous years. class on a tactical, off-benchmark basis bond markets to gain exposure to our
over the last several years. Where relevant, four risk factors.
USD Medium Risk SAA
Equity related Rates related Credit related Diversifyers
Developed Markets (27%) Global Government Bonds (8%) Global IG Credit (10%) Cash (2%)
Commodity (5%)
Global High Yield (6%)
Other HFs (5%)
EMD Hard Currency (3%)
Emerging Markets (5%) EMD Local Currency (4%) EM Corporates (3%)
Equity HFs (5%) Credit HFs (5%)
Real Estate (3%)
Private Equity (5%) Inflation-linked (1%) Private Debt (3%)
Private Markets Hedge Funds Liquid Markets
Source: HSBC Private Banking, 23 March 2021.
12Investment Outlook Second Quarter 2021 13
Top trends for 2021
1: Recharging Asia’s Growth
We remain positive on Asia’s structural bode well for Asia’s technology sector re-entry opportunity into structural
growth trajectory and see many earnings outlook, as indicated by the 50% winners and Asian recovery leaders.
thematic investment opportunities, spike in DRAM prices since mid-January. Within Asian equities, we stay overweight
including our themes Riding on China and Singapore given their positive
China’s Five-Year Plan, Asia’s Supply To reflect the impact of vaccine recovery outlook and attractive risk-reward
Chain Revamp, New Asian Consumer breakthroughs and stronger global profile.
and Asian Credit Opportunities. The recovery, we have raised our 2021 GDP
themes benefit from structural factors growth forecasts to 3.8% (from 3.2%) for
Japan, 3.4% (from 2.7%) for South Korea
Riding on China’s
such as a clear Chinese 5-year plan, a
strong regional position in technology, and 5.0% (from 3.5%) for Taiwan. We also Five-Year Plan
growing consumer wealth, as well as raised our GDP growth forecast for India to
China’s National People’s Congress (NPC)
the global cyclical recovery. 11% from 9.0% for the 2021 fiscal year to
confirmed a gradual policy normalisation
reflect stronger industrial activity. Overall
without major change to the supportive
As we enter Q2, Asian economic recovery we have upgraded our 2021 GDP forecast
fiscal and monetary policy stance. The
is broadening and gathering pace. In for Asia ex-Japan to 7.6% from 7.5%,
Government Work Report 2021 has
February, the Asian electronics PMI and expect almost all Asian economies
reaffirmed the top policy priority on
surged to a cycle high, close to previous to recover to their pre-pandemic output
sustaining the recovery with a strong
semiconductor super-cycle levels in levels by the end of 2021 except Japan,
focus on job creation, quality growth and
2018. Robust domestic demand and Thailand and the Philippines.
the 14th Five-Year Plan (FYP, 2021-2025).
stronger-than-expected global demand
With the post-pandemic recovery being
boosted Asian exports, particularly The better-than-expected Q4 2020 Asian
the number one policy goal, we believe the
for the technology-driven North Asian reporting season supports our expectation
PBoC is in no hurry to tighten monetary
economies. Mainland China, Japan, South of a robust and broad-based earnings
policy and we do not expect any policy
Korea and Taiwan stand out as geared recovery in 2021. Consensus estimates
rate hike this year. The “Dual Circulation
beneficiaries of the digital transformation of 28% 2021e EPS growth projected for
Strategy” under the 14th FYP has
accelerated by COVID-19. The global Asia ex-Japan support the Top Trend of
made a further policy pivot to domestic
shortage in semiconductors and fast Recharging Asia’s Growth. We consider
consumption, technological innovation
growing demand for consumer electronics the recent tactical pullback triggered by
and the green revolution.
rising global bond yields as an attractive
Most Asian economies will recover to pre-pandemic levels by the end of 2021
Most Asian economies will recover to pre-pandemic levels by the end of 2021
14
12
12
2022
10
9 9
8 8 8 8 8
8
2021 7 7
6
5
4 4 4
4
2020
2
2
0
Mainland Sri Taiwan Vietnam New Australia South Hong India Indonesia Singapore Thailand
China Lanka Zealand Korea Kong Malaysia Japan Philippines
Quarters to pre-pandemic level activity
Source: HSBC Global Research, HSBC Private Banking as of 23 March 2021. Note: the graph represents the number of quarters the economy will likely need to
recover fully from the recession caused by the pandemic’,
14Supportive policy measures and key and wind power operators, renewable find plenty of investment opportunities in
development targets unveiled in the energy equipment providers, grid and the remodelling of Asia’s supply chains
14th FYP underpin attractive investment transmission, energy storage, new energy in the course of the recovery from the
opportunities from the digital consumption vehicle manufacturers, batteries producers pandemic disruptions. Asia’s technology
boom, China’s innovation-driven growth and electric vehicles supply chains. supply chain is pivotal to the world,
model, its industrial upgrade plan and given it is the largest production base
low carbon transition. The government Asia’s Supply Chain of semiconductors with 80% of global
set a quota of RMB3.65trn in issuance of installed wafer capacity located in the
special local government bonds, which Revamp region. Asia’s exports have stayed very
will be deployed to fund infrastructure Recovering from COVID-19 disruptions, resilient throughout the global pandemic,
projects and address the debt loads of Asian manufacturers are actively as industry leaders in the region have
local government financing vehicles. We upgrading their supply chains and gained market share from global
expect the infrastructure growth will be optimising production models in response competitors which suffered from the
led by digital infrastructure investment and to the changing dynamics in geopolitics, fallout of supply chain disruptions.
development of smart city clusters. The trade policies and production costs. We
policy pivot to private consumption and
the digital economy should bode well for
the growth outlook of the ecommerce, -
China’s transformation towards a consumption-led economy under the 14th FYP
discretionary and service consumption
in China. Riding on the emergence of 60
Chinese middle class consumers in the
Industry Services
next five years, we position in quality
growth leaders in the internet and
55
consumer discretionary sectors with
strong brands and robust
business models.
50
The new five-year plan delivered policy
stimulus measures including tax incentives
for R&D, increased public spending on 45
basic research, and measures to widen the
funding channels for startups. These policy
initiatives should support China’s pursuit of
self-sufficiency, upgrading and localisation 40
of core technologies. Key investment
opportunities include local industry
leaders in the high-tech hardware and 35
components, robotics and automation,
smart manufacturing, artificial intelligence,
digital supply chain, data centres, cloud
30
computing, 5G technologies, the Internet
of Things and biotechnology. The 14th FYP
guidelines on the low carbon transition are
consistent with the targets of achieving 25
carbon emissions peak by 2030 and
carbon neutrality by 2060. To achieve
decarbonisation of the Chinese economy,
20
there will be massive investments in new
1980 1990 2000 2010 2020
capacities in renewable energy and new
energy vehicles in the next five years. Source: CEIC, HSBC Global Research forecasts, HSBC Private Banking as of 24 March 2021. Past
We see promising opportunities in solar performance is not a reliable indicator of future performance.
Investment Outlook Second Quarter 2021 15We expect the upgrading of Asia’s Notably, RCEP is expected to reinvigorate to further relocation of manufacturing
technology supply chain to speed ASEAN’s supply chains and attract new capacity from China to Southeast Asia to
up after the pandemic due to strong foreign direct investment from North mitigate tariff risks.
demand growth of semiconductors Asia. Thailand has announced policies
driven by increased consumption of to establish the country as an electric
New Asian Consumer
work-from-home products. In the process vehicles production hub in the next five
of Asia’s supply chain revamp, North years. Malaysia has built up 4.3 gigawatts An important engine recharging
Asia should see closer ties in advanced of solar-cell-module manufacturing Asia’s growth is the rebound in private
manufacturing while Southeast Asia capacity, making it the third-largest consumption. We are looking for a robust
is expected to attract new investment maker outside of China. ASEAN will also 7.8% rebound, in real terms, in Asian
in both labour-intensive industries and benefit from China’s strong position in private consumption this year after the
mid-to-high-end manufacturing capacity. artificial intelligence, cloud computing, -3.7% decline in 2020 caused by the
drones and other technologies, which the pandemic disruption. As of mid-March,
The Regional Comprehensive Economic bloc needs to upgrade the viability and all Asian economies that we track except
Partnership (RCEP), which will enter into competitiveness of its existing value chain Taiwan and Vietnam have started mass
force in July 2021, is poised to reshape and supply chains. At the same time, the vaccination programmes. Japan, Hong
the supply chains in Asia. According Biden administration’s ongoing review Kong, Singapore, Malaysia and South
to a study of the Peterson Institute for of the US supply chains and lingering Korea have already secured enough doses
International Economics, China, Japan US-China trade issues may also lead to vaccinate at least 50% of their
and South Korea are expected to see
the biggest increases in exports by 2030
80% of global installed wafer capacity is located in Asia
under RCEP, especially for exports across
each other’s markets. The bulk of the gains
are expected to be realized in advanced 120
manufacturing such as electronics,
machinery and auto vehicles given the
US Europe China Taiwan
complementary patterns of their supply
S. Korea Japan Singapore
chains. Furthermore, we expect that the
new EU-China Comprehensive Agreement 100
on Investment (CAI), which was signed
2019-2030 Installed Global Wafer Capacity Projection
in January, will help China move further
up in the value chain in advanced
manufacturing industries. The EU-China
80
CAI will likely deepen China’s integration
with the advanced manufacturing supply
chains of Japan and South Korea.
Under the RCEP framework, we anticipate 60
accelerating economic integration within
Asia and rising intra-regional trade flows,
offering a catalyst for further supply
chain integration between North Asia
and ASEAN. This structural trend will 40
promote optimisation of supply chains
across the region, as Asian manufacturers
are expected to take advantage of lower
production costs in other RCEP member
20
countries to achieve diversification of their
regional production bases. We expect
more Asian manufacturers in the high-cost
locations to relocate their production
capacities in textiles, apparel and toys 0
manufacturing to lower-cost countries in 2019 2025 2030
Southeast Asia under RCEP. Source: Semiconductor Industry Association, HSBC Private Banking as of 24 March 2021
16populations, according to the Duke We remain bullish on companies through near-term volatility in inflation
University Health Innovation Center. Asian exposed to digital consumption in China numbers and bond yields. We do not
vaccination rates are steadily and Asia. China’s favourable policies to expect any policy rate hike in Asia in 2021,
rising while infection rates are far below stimulate consumer spending and rural given average headline inflation in Asia
other advanced economies, paving consumption under the 14th FYP will is around 110bp below the mid-point of
the way for normalisation of consumer bring attractive opportunities in the digital the respective central banks’ inflation
activities and tourism, especially economy and consumer discretionary targets. Should US bond yields continue to
intra-regional travel in Asia. sectors. We favour digital consumer overshoot, Asian central banks would take
facing companies in the ecommerce, policy action to try to prevent any undue
Against the backdrop of global vaccine digital payment, online education, mobile rise in domestic funding costs which could
deployment, we see compelling recovery gaming, online entertainment and food threaten the cyclical recovery.
opportunities in Asia’s consumption delivery sectors. Despite gradual easing
and service sectors in H2 2021. Industry of COVID-19 headwinds as a result of We favour Asian corporate bonds due
leaders in the retail, travel and hospitality vaccine implementation, we believe the to their strong credit fundamentals and
industries should stage a sharp earnings structural trend of digital transformation substantial yield pickup over developed
turnaround from the deep profit will continue to proliferate across Asia, as market credit with similar credit metrics.
recession in 2020. China has launched its consumer preferences have fundamentally The Chinese government’s recent
“vaccination passport” which stores the shifted in favour of online transactions clampdown on over-leveraging in the
vaccination data for the person, and can during the pandemic. The public health real estate sector has added volatility in
facilitate the reopening of international crisis has also spurred consumer demand the credit market and pushed interbank
travel between China and other countries. for wellness, sportswear, healthcare market interest rates higher. But we see
Singapore and Australia are negotiating services and personal hygiene products. market fears of China policy tightening
for a “travel bubble” agreement to allow We prefer big cap consumer companies risks as overdone, as the China NPC has
their residents to travel between both with strong brand franchise and reaffirmed the policy priority to support
countries without the need for quarantine competitive market positions. growth recovery. Within the Asian credit
as early as this July. In Q1, Singapore market, we are overweight hard currency
established a one-way travel corridor with
lower-risk countries and reciprocal “green
Asian Credit Opportunities and local currency credit in China and hard
currency bonds in Indonesia.
lanes” with higher-risk countries to allow Despite the short-term volatility in US
essential business and official travel to Treasury yields, we retain our high
resume. All these positive developments conviction theme of Asian Credit
are supportive of a strong rebound in Opportunities due to attractive risk-return
private consumption and services in Asia trade-off of the Asian bond market. We
later this year. expect Asian central banks will look
Investment Outlook Second Quarter 2021 172: Recovering in a low yield world
While our top trends are generally
structural in nature, ‘Recovering in a
the domestic economy, with money for
low earners, small businesses and local
Still a low yield world
low yield world’ is a hybrid. Structural authorities. Unsurprisingly, our Reopening We have often discussed our view that
forces should keep yields low relative America theme has been popular, and it bond yields are low because of structural
to history, but the theme also caters to continues to capitalise on this recovery, reasons, including global ageing, the Asian
cyclical forces, which are causing some taking a pro-cyclical stance, with a focus savings surplus and our view that higher
rate volatility, upside to earnings and on industrials, materials, and financials. government debt leads to structurally
to dividends. As the cyclical recovery Small and mid-cap stocks are often highly lower growth. Inflation has been on a
unfolds, we have tweaked some of exposed to the local economy, and we long term downward trend too, due to
the themes, but the combination therefore believe it makes sense to add technology (e.g. price comparison sites
of improving growth and still low some of those to portfolios which are and automation), globalisation and the
yields continues to support a risk-on often naturally focused on large caps. fall in unionisation rates. Some have
environment. argued that globalisation is declining as
The global recovery is not only benefiting supply chains are reorganised, with more
The cyclical recovery financials in the US, but also elsewhere in
the world. We are overweight financials
re-onshoring to avoid disruptions due
to pandemics or trade tensions. But we
Since we wrote our 2021 outlook, the for their cyclical exposure, but also would argue that this is more than offset
economic data have become increasingly because we believe that many will start to by further globalisation of the labour
positive, causing economist across Wall pay dividends or buy back shares again. market: with even more economic
Street to gradually upgrade their growth These activities were cut sharply in 2020, activity moving online, workers can
forecasts. Ours have done the same, because of a fall in profits or requests increasingly do their job from anywhere
with upgrades in the US, UK, and other by regulators, who wanted them to in the world, causing increased global
countries leading to an upgrade of 2021 protect their capital buffers. Our Resilient competition in the labour market, and
world GDP growth estimates from 4.4% Income theme rightly was very selective keeping wages low.
then to 5.6% now. Global manufacturing on dividend stocks in 2020 and focused
has continued to improve, and near on dividend preservation, while it is now But while yields should remain low, we
record high PMI readings suggest that oriented towards dividend growth. Banks have been positioning for more short
business leaders are optimistic about the are not the only sector where dividends term volatility. That volatility comes from
future. Orders are high, and inventories can be lifted, but the prospects there are temporary oil price base effects and bottle
will need to be replenished from very good, because of lower than expected necks when the economy reopens. The
low levels. Looking ahead, consumption, loan losses, and the recent steepening of markets are trying to assess how much
which accounts for more than half of yield curves, which should boost profits. the vaccination programmes and US fiscal
GDP in most countries, may contribute While yields are still low because of stimulus will boost growth and inflation.
the most to the improvement of activity structural reasons, even their recent mild As there is much uncertainty around these
in coming months. This is because increase is already very significant for points, market sentiment and bond yields
during the lockdown, many consumers banks’ profits. may continue to swing up and down
saved more than usual, and they are depending on the incoming data and Fed
eager to spend more as life gets back governors’ speeches. In our bond portfolio
to normal. In many countries such as strategy, we try to temper volatility
the US, unemployment is falling. And through diversification, and we manage
fiscal support – most recently in the form rate and cyclical risks respectively by
of president Biden’s $1.9trn spending adopting moderate duration and selective
package – is providing strong support for credit risk.
18On the aggregate, however, we believe The pandemic has led to a further acceleration of the debt build-up, which
that central banks will manage to avoid should be deflationary in the long term
excessive bond market volatility. With
structurally low yields, the search for 160
China Euro area United Kingdom United States
yield thus continues, and investor interest
140
remains buoyant in Emerging Markets,
where allocation remains light, especially 120
in local currencies, despite robust inflows
from November to February. While 100
% of GDP
EM bonds will continue to face US rate
80
volatility in the short-term, we believe they
remain one of the main beneficiaries of 60
the global search for yield as they continue
40
to offer attractive carry opportunities
relative to other bond markets. We are 20
selective in our allocation and generally
prefer hard-currency bonds from China, 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Indonesia and Brazil, mostly issued
by corporate with improving credit
Source: IMF World Economic Outlook, HSBC Private Banking as at 11 March 20211. Forecasts post 2020 are
fundamentals. As for local-currency debt, subject to change, 23 March 2021.
we continue to favour defensive markets
such as China, but also higher-beta
countries such as Russia, Brazil and
Dividend futures reflect the market’s expectations that dividends are on the rise
Mexico, where local rates still exhibit
around the world
positive real buffers and currencies are
prone to appreciation. S&P 500 2021 dividend future
We also continue to find the yield pickup Eurostoxx 2021 dividend future (RHS)
70 140
in Developed Markets Financials Credit 130
65
attractive across the subordinated part of 60 120
the capital structure, in the US and Europe. 110
55
Following the tightening of Senior and 50
100
Tier II spreads, we have become relatively 90
45
more constructive on Tier I securities, 80
40 70
taking comfort from rising capital ratios, 35 60
which are at historically high levels. We 30 50
remain selective when going down the 25 40
capital structure however, and generally Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20
continue to focus on higher credit quality
banks. In the Eurozone periphery, we
Source: Bloomberg, HSBC Private Banking as at 11 March 20211. Past performance is not a reliable indicator
focus on the largest banks in each nation of future performance, 23 March 2021.
and avoid second tier issuers.
Investment Outlook Second Quarter 2021 193: Digital Transformation
Some transformations are dramatic booking services that screen patient remains fiction, the science is delivering
metamorphoses, like the caterpillar information; telemedicine that avoids increasing automation to many aspects of
becoming a butterfly, while others initial face-to-face meetings; greater use our daily lives.
are subtle, such as the chameleon of screening and testing to provide rapid
changing its skin colour. And so it diagnosis; e-prescriptions and online Let’s look at several examples where
is with the transformations we are dispensary services. Essentially, a GP automation has become an integral part of
witnessing the introduction of new surgery becomes the hub from where the product and/or service.
digital technologies. digital healthcare services are coordinated
within the community. Automobiles are in the midst of the
biggest disruption since the launch of the
Healthcare Innovation, At the other end of the technological scale, first cars as electric motors replace the
more than a other developments have had dramatic internal combustion engine and vehicles
metamorphosis! impact, but are less visible as they affect are more electrical rather than mechanical
very small segments of the population. products with electricity rather than
Healthcare is an essential service and For example, inherited genetic diseases, petrol being the primary source of power.
the pandemic has made it a hot topic many of which affect a tiny fraction Automation has already been trickling
both politically and personally. However, of the population, but often lead to a into vehicles for several decades, initially
for something so important the service significant shortening in life expectancy with things like automatic transmission,
has been in many ways like Robert Louis and/or debilitating symptoms with few cruise control and navigation systems,
Stevenson’s Dr Jekyll and Mr Hyde. The if any treatment options. This is about but more recently with self-parking and
service has been quick to adopt cutting to change for some conditions with the braking and lane control. The introduction
edge medicines, diagnostics, devices and introduction of CRISPR (clustered regularly of electric vehicles facilitates further levels
machines (more Dr Jekyll), but has been interspaced short palindromic repeats) of automation effectively making vehicles
less embracing of other technologies that gene editing tool that is able to identify, more autonomous. Vehicles diagnostic
are transforming other sectors (more Mr delete and where required add genetic systems can already determine the need
Hyde). The pandemic has been a catalyst sequences in faulty DNA within the for a service or malfunctions and some
for change and in 2021 we are starting patient’s cells. The technology has been are capable of contacting the garage
to see signs that healthcare services are used to successfully treat patients with where the work can be scheduled and a
realising things cannot continue as they thalassaemia and patients with sickle cell replacement car reserved, with an SMS
were. They are embracing changes anaemia - a condition effecting tens of informing the owner. Fully autonomous
that will be essential in many countries millions of people. The same technology self-driving vehicles are probably still
as costs rise and populations age. has promise as a treatment for conditions at least a decade away, but they are
We will shine a light on two very different such as haemophilia, cystic fibrosis, tantalisingly close to that dream
areas at either end of the innovation muscular dystrophy and select hereditary being realised.
technology spectrum. eye diseases.
The financial sector has seen significant
General practitioners or GPs are most disruption albeit less dramatic. In the
patients’ main first point of contact with
Automation, more science insurance sector, it started slowly when
healthcare services and part of this and less fiction new entrants only sold insurance policies
service is on the cusp of transformation. directly to consumers over the telephone
For the generation of children who
The way GPs provide primary healthcare thereby lowering costs for consumers
grew up in the 1950s and 1960s whose
has seen little change since Robert and the insurers. The internet shifted
imaginations were fed on a diet of science
Louis Stevenson’s time a century ago, applications and claims online with
fiction films, TV series and comics,
often involving face-to-face contact and comparison websites identifying the best
automation was imminent and would
multiple steps over several weeks or even deal. In the latest iteration, insurers have
impact almost every aspect of our lives
months. The pandemic and the risks of further automated the process, including
and potentially adults would no longer be
face-to-face meetings have opened up the use of AI software to assess policy
required to work as robots took over their
an opportunity for GPs to adopt several applications to assess risk and generate
tasks. Fast forward to 2021, and while
innovative technologies including online bespoke competitive risk adjusted pricing;
things such as colonising distant plants
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