Recovering and Rebuilding - Investment Outlook First Quarter 2021
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Global Chief Market Strategist Contributors 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 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 Head of Sustainable Product Offering Global Head of Hedge Funds Sophie Haas Richard Berger sophie.l.haas@hsbcpb.com richard.berger@hsbc.com +44 (0) 207 024 0283 +44 (0) 203 359 6139 Global Market Analyst, Real Estate Investment Senior Product Specialist | Private Market Investments Guy Sheppard Jorge Huitron guy.r.sheppard@hsbc.com jorge.emilio.huitron@hsbc.com +44 (0)207 024 0522 +44 (0) 203 359 7040 2
Contents Letter to clients 05 What will drive markets in 2021 06 Portfolio Strategy: Top 10 Tips for 2021 10 Three hidden insights from the Market Patchwork 12 Top Trends for 2021 1. Recharging Asia’s Growth 14 2. Digital Transformation 18 3. Recovering in a Low Yield World 22 4. Investing for a Sustainable Future24 Sustainability: Moving from responsible to sustainable investing 26 Equities28 Fixed Income 32 FX and Commodities 36 Hedge Funds 38 Private Markets 40 Real Estate 42 Disclaimers44 Investment Outlook First Quarter 2021 3
Click below to watch our Chief Market Strategists team discuss our market views for 2021. Recovering and Rebuilding Investment Outlook First Quarter 2021 4
Welcome Dear client After a turbulent 2020, markets have All of these factors can lead to volatility, trend, but also because 2021 should be a started to look forward to friendlier which means that investors need to remain pivotal moment for sustainable investing, fundamentals. Global economic growth selective and diversified, but it also means due to strong government commitments, is improving, and broadening beyond that 2021 will present hedge funds with a rapid technological advances in this manufacturing and the digital economy. rich opportunity set. Importantly, none of area, and the major expansion in The vaccine should allow consumer the potential triggers of volatility we listed investment options. confidence to pick up, and the all-important above challenge our two fundamental consumer sector to become an additional assumptions, that profits will expand and We continue to see many interesting engine of growth. At the same time, interest rates will remain low. And as long investment opportunities in EM Asia, which governments are rebuilding their as those two assumptions are valid, it is we prefer over other emerging markets. economies, and the healthiest companies appropriate to maintain an overweight China’s dual circulation strategy, focused are investing to adapt to the new post stance to risk assets and a cyclical on measures to boost domestic demand, COVID-19 realities and opportunities. All of sector bias. technological innovation and market this means that the global economy and liberalisation should boost growth, give corporate profits should be bigger and The broadening of the economic expansion long term direction to investors and lead to healthier in 2021 than they are currently. is naturally also broadening the sector fund flows into the region. leadership in the stock markets, and The other piece of good news for riskier we thus hold overweight positions in So, although the uncertainties and changes assets is that policy rates should remain technology, industrials, materials, consumer around us may leave some investors very low and stable, with US Treasury discretionary and communication uncomfortable, it is clear that there are yields trading in a broad range. Rising services. But this broadening does not plenty of specific areas where companies profits, combined with low rates, are a mean that technology – which had been can do well. And on the aggregate, powerful combination for risk assets. principal engine of stock markets – will the cyclical improvement and a strong We therefore maintain our overweight underperform in 2021. The digital revolution commitment from central banks to low on global equities, investment grade and continues unabated, and technology interest rates not only support the current BB-rated corporate bonds, and EM hard leaders should continue to see strong high valuations of most risk assets, but also currency bonds. growth in the medium term. These tech keep us invested with an eye on further leaders can be found outside of the tech upside in riskier assets. Holding lots of cash That does not mean that 2021 will be sector as well, in areas such as automation, is not the answer to managing the volatility uneventful. First, the vaccine rollout is health technology and 5G. Technological we will undoubtedly experience in 2021. unlikely to be an entirely smooth process, leadership is one of the key determinants Rather, we remain invested with a pro-risk and any delay or disappointment in of whether a company is fit for the future. and cyclical stance, but with a selective adoption rates could lead to some By contrast, we note that many value approach and plenty of diversifiers, temporary market volatility. Second, we stocks have outdated business models and including gold, high rated bonds, hedge foresee some temporary upside in inflation investors should beware of falling into such funds and other alternative assets. readings early in the year, as crude oil’s value traps. fall from $70 to $20 between January and We would like to wish all of our clients a March 2020 will cause year-on-year base Businesses that want to be future-proof not happy and prosperous New Year. effects between January and March 2021. only need to be part of the digital revolution, Third, corporate default rates will probably but also the sustainability revolution. And in go up further, before they come down. our view, their performance will be better if Fourth, on the political front, Brexit, the they aren’t just part of it, but if they lead it. new US administration’s foreign policy, This is because such businesses that rank Georgia’s Senate race or frictions with best in class will be earlier to identify the Congress, can all lead to political headlines. ESG-related threats and opportunities, and And lastly, of course, the run-up in be more likely to have the talent to adapt to Willem Sels, valuations to date can lead to profit taking them. For investors, sustainability not only Global Chief Market Strategist and adjustments in investor positioning. matters because it is a strong and durable 10th December 2020 Investment Outlook First Quarter 2021 5
What will drive markets in 2021? The basics » Rebuilding: Fiscal spending is headline CPI and to temporary bond supportive of growth, and is likely market volatility, but this should not Economic outlook: to focus on 5G, green infrastructure trigger a change in central bank policy. and housing support. In some EM » In EM, there is now reduced scope for » Recovering: Manufacturing has countries, the scope for fiscal support further rate cuts. In some countries, been stronger than services. Online is more limited. Companies will also inflation could pick up following consumption has been resilient, invest for the new economic realities, in currency depreciation, and the higher especially in the US and China. In areas such as automation, supply chain weight of oil in their CPI measures 2021, the rollout of vaccines against relocation, 5G and data capabilities. when compared to DM. COVID-19 should gradually boost consumption, and hence broaden Interest rates and bond yields: Risk premia: the recovery. » In developed markets (DM), we expect » With the US elections and Brexit » Geographical split: economic low and stable interest rates, and behind us, and reduced geopolitical momentum is most positive in the US central bank support to keep safe uncertainty, risk premia may fall, and China, with China contributing haven bond yields low. leading to a relief rally in risk assets and most to global GDP growth in 2021. Europe may accelerate later in the » Higher government debt and deficits carry assets (especially when there is year but COVID is a major challenge should not lead to inflation in DM. better news re: COVID). for now. Some cost pressures and oil price base effects could lead to a small uptick in Equities We expect a global recovery and believe inflation should remain relatively low. » Market cap: the relatively high weight of technology stocks favours US and Real GDP growth Inflation Chinese benchmarks » China’s Dual Circulation strategy 2020f 2021f 2022f 2020f 2021f 2022f supports consumer demand, which could be helpful for Western firms too. World -4.1 4.4 3.3 2.5 2.6 2.6 Financial market liberalisation should be a positive for CNY. In technology Developed -5.7 3.5 2.5 0.7 1.3 1.5 however, China has a desire to localise core technologies. Emerging -1.8 5.7 4.3 3.7 3.5 3.3 » Income through equities: dividends could be raised selectively, and a US -4.1 3.1 2.5 1.2 1.8 1.8 search for income can help REITs with resilient fundamentals Eurozone -7.5 4.5 2.8 0.2 0.7 1.4 UK -11.0 3.7 4.8 0.9 1.5 1.9 Japan -5.5 2.3 0.8 0.0 0.1 0.1 Mainland China 2.4 7.5 5.6 2.7 2.0 1.7 India -8.0 7.2 4.5 5.7 4.2 4.4 Russia -4.3 2.4 1.3 3.2 3.5 3.5 Brazil -4.2 3.2 2.3 2.7 2.6 3.4 HSBC Global Research, HSBC Private Banking as at 9 December 2020. Forecasts are subject to change. 6
Sustainability for a better China currently accounts for 18% of global GDP, but may be responsible for 32% of the world’s growth in 2021 and 2022. future » Investor flows and investor scrutiny US Euro area UK Japan will force companies to become more Other DM China India Brazil sustainable, and will increase share Russia Other EM Asia Other EM price performance differentiation 100% between firms with high or low 90% sustainability scores. 80% » Commitments in the 2015 COP21 70% Paris agreement, and the upcoming 60% UN COP26 Climate Change 50% Conference in the UK will continue 40% to lead to large public investment. 30% Our high conviction themes include 20% Climate Change - Mitigation and 10% Adaptation Opportunities and China’s 0% Green Revolution. Share in 2020 world GDP Contribution to 2021 and 2022 world GDP growth Source: IMF, HSBC Global Research, HSBC Private Banking as at 9 December 2020. Investment Outlook First Quarter 2021 7
What to watch The question of rotation: We believe Fed rates will remain unchanged in 2021, and Treasuries should In 2020, there were several short-lived range trade. episodes of market rotation from large 8% cap to small cap, from high quality to 10-year Treasury yield Fed funds policy rate lower quality stocks, and from growth 7% to value stocks. None of those were sustained, and we think investors should 6% remain selective when participating in this rotation. We doubt that bond yields 5% will move higher to support the rotation, and we think growth stocks have 4% structural support. 3% Downside risks: 2% » Path of the virus and speed of the forecasts vaccine rollout: it remains unclear 1% how quickly the vaccine rollout will halt lock-downs, when the active 0 population will be vaccinated and Jan-00 Jan-05 Jan-10 Jan-15 Jan-20 how much it lifts consumer confidence Source: Bloomberg, HSBC Private banking as at 9 December 2020. Past performance is not a reliable and spending. indicator of future performance. Forecasts are subject to change. » Corporate defaults: markets currently anticipate a spike in defaults, followed by quick fall. There is a risk that this fall could be delayed. » Potential EM stress: COVID-19 related How tech and new economy stocks fare will impact the relative performance of economic or financial stress could lead equity indices. to wider spreads and falling currencies in some weaker EM countries IT Consumer disc retionary Communic ations services Healthc are Financ ials Industrials » Climate risks: there are bound to Consumer staples Utilities Real estate be natural disasters in 2021, which will trigger more regulation and Materials Energy sector weight in benchmark indices investment, or accidents which could 100% hurt specific companies 90% 80% » Taxation will have to increase at 70% some point to finance the increased 60% deficits. This will probably have to 50% wait till 2022, but fears of tax rises 40% could hit confidence. 30% 20% » The new US administration will likely 10% take a multi-lateral foreign policy 0% approach, but geopolitical risks have S&P 500 Europe UK Shanghai ChiNext Hang Stoxx 600 FTSE 100 Comp Seng not been eliminated. Source: Bloomberg, HSBC Private Banking as at 9 December 2020. » Positioning and valuations: when market optimism is elevated, and momentum has driven markets towards new highs, there is a risk of profit taking and temporary market volatility. 8
Portfolio Strategy Top 10 Tips for 2021 1 ide the ‘Recovery and R Rebuilding’ wave 4 Stick to the Strategy business models, which we see as value traps. We have a risk-on stance in our model We believe it is helpful to keep the positive portfolio, with overweights in global equities, investment grade and BB-rated growth and rate fundamentals in front of our minds throughout 2021 to avoid being 8 Don’t Give up on Gold high yield bonds, and hard currency blown off-course. We foresee volatility We foresee mild upside for the gold price emerging market bonds. We fund this on several fronts, but much of it may be and maintain an overweight in our model principally through our underweight on noise. During 2021, oil price base effects portfolios. Low rates mean the opportunity safe haven bonds. In equities, we have may give the impression that inflation is cost of foregoing a coupon is small. The a cyclical sector stance. All of this is picking up, and the economic recovery market volatility we foresee, and the based on our view that the global may trigger speculation about policy remaining uncertainties around COVID-19 economy is recovering and rebuilding, normalisation. But ultimately, the low for and geopolitics mean that diversification earnings should improve and equity and longer rate environment should prevail. remains important. Many investors have credit valuations are supported by the low COVID-19 related and other headwinds reduced high rated bond exposure, which yield environment. could create headlines, but ultimately, the raises the importance to add gold. gradual recovery should prevail. 2 Asia stays Ahead 9 Divergent Dollar We continue to prefer Asian equity 5 Digital Dominance The US dollar was strong for many years markets over other EM stocks. Asia’s The digital revolution continues to drive but fell significantly in 2020. From here, growing middle classes boost domestic much of the profit growth, and separates we think it will be more directionless, demand and Asia has a bigger share of winners from laggards, across sectors. with diverging paths depending on the technology and advanced manufacturing Although equity leadership is broadening, currency pair. We think EUR and GBP than in other EM markets. China’s dual tech should continue to perform well will see weakness against USD, while circulation plan sets a clear direction and in 2021. AUD, NZD, NOK and SEK should should boost investor confidence. And outperform USD. Asian countries on average have more policy flexibility than other EM. Investors 6 Adopt a Sound Sustainability Strategy are still underweight on EM assets and as The sustainability revolution is arguably 10 Healthy Fundamentals for Hedge Funds they broaden their search for returns in a as much as a game changer as the 2021 should provide a rich opportunity risk-on environment, Asia should digital revolution. Sustainability should set for good hedge fund managers. see inflows. therefore be integrated both in the core Markets’ focus on where inflation and portfolio strategy (where it can help rates are going can create volatility and 3 Low for a Lot Longer investors outperform or reduce risks), and in thematic satellites (focusing on the opportunities. Hedge funds can pick winners and losers from the changes We stick to our view that bond yields will opportunities). around COVID-19 and the digital be kept low by structural factors, and revolution. And defaults and restructuring that stronger growth should not push up G7 policy rates. We believe the 10-year 7 Cheap can be Costly provide opportunities for distressed hedge fund strategies. Treasury yield will largely range-trade Our cyclical sector tilt does not mean that below 1% in 2021. We react to this we move into low quality. We maintain our environment in three ways. First, we avoid focus on quality. Strong balance sheets holding high cash balances, as the low will be important if COVID-19 keeps cash cash rates present an opportunity cost. flow below normal, and allow companies Secondly, we look for a yield pickup in to invest and adapt to the changing Investment Grade, BB High Yield and economy. And while there may be some EM Hard Currency bonds. Third, we opportunities in value stocks, we generally see opportunities in stocks with resilient continue to prefer growth stocks. We dividends, selective REITs, real estate and beware of value stocks with outdated private credit. 10
Q1 2021 Investment Outlook Top Four Investment Q1 2021 Trends for 2021 and Q1 Global High Conviction Themes Outlook Top Four Trends for 2021 and Q1 Global High Conviction Themes Top Four Trends for 2021 and Q1 Global High Conviction Themes Recharging Asia's Growth Recharging Asia's Growth Recovering in a Low Yield World CORE Investing for a Sustainable Future Recovering in a Low Yield World CORE Investing for a Sustainable Future Digital Transformation Digital Transformation Recharging Asia's Growth Recovering in a Low Yield World Digital Transformation Investing for a Sustainable Future Riding on China's Five-Year Plan Reopening America 5G: NextGen Connectivity Climate Change – Mitigation and Asia's SupplyAsia's ChainGrowth Revamp Resilient Income Healthcare Innovation Adaptation Opportunities Recharging Recovering in a Low Yield World Digital Transformation Investing for a Sustainable Future New Asian Consumer Focus on Quality Digital Consumer China's Green Revolution Riding on China's Five-Year Plan Reopening America 5G: NextGen Connectivity Climate Change Sourcing Income in–aMitigation Sustainableand Asian Credit Opportunities EM Debt – Carry in a Low Automation – Shifting up a Asia's Supply Chain Revamp Resilient Yield Income Healthcare Innovation Gear Adaptation Opportunities Way Environment New Asian Consumer Focus DM on Quality Digital Consumer China's Gender Green Revolution Diversity in Business Financials Credit Asian Credit Opportunities EM Debt – Carry in a Low Automation – Shifting up a Sourcing Income in a Sustainable Yield Environment Gear Way DM Financials Credit Gender Diversity in Business Cash Underweight Cash rates are unattractive in most markets and present an opportunity cost. Government Underweight Safe haven government bond yields are likely to mostly range trade at a low level, and bonds provide little attraction. We are mainly underweight to finance the overweight in other asset classes. Investment Overweight We prefer IG over safe haven bonds to capture the yield pickup. That said, spreads have Grade bonds tightened and investors should be aware that spread or rate volatility can impact returns (IG) substantially. High Yield Overweight We are overweight on BB-rated HY to capture the carry, but believe low rated HY does bonds (HY) not adequately compensate for default risk, which we think is still on the rise. EM Hard Overweight We see carry opportunities in EM HC but focus on countries and companies with Currency resilient fundamentals. bonds (HC) EM Local Neutral EM currencies have a mixed outlook, and this will impact returns. Hence, we remain Currency selective in the EM local currency space. bonds (LC) Equities Overweight We are overweight on stocks as earnings should benefit from the economic recovery, and low bond yields should support current valuations. We prefer the US and China over Europe, and Asia over other EM. Commodities Overweight We overweight gold as we see mild upside and appreciate its diversification potential. We have a neutral outlook on oil. Hedge Funds Neutral HF will have a rich opportunity set in 2021 and are an important diversifier in portfolios. Investment Outlook First Quarter 2021 11
Three hidden insights from the Market Patchwork Most investors have seen the “market example, an individual, concentrated cash over time, as the rightmost column patchwork” chart at least once. One asset class could easily sell off by 50%. in the chart would indicate. Indeed, since of the key messages in the chart is After that, a 100% return is needed just 2006, the performance of cash lags that of immediately obvious: performance to break-even. This asymmetry is much most other asset classes. of individual asset classes is highly smaller when a portfolio is less volatile unpredictable – in any given year, they due to diversification: after a 20% sell-off, 3) An individual asset class can do can perform either very well or very a rally of 25% is sufficient to bring us back really well even over an extended poorly. Diversifying the portfolio, on to the starting point. Volatility drag is the period of time, but that does not the other hand, can help avoid having reason why simply investing everything necessarily imply its superiority. a very bad year. in an asset class with the highest average As an example, high yield bonds However, careful analysis of this chart annual return can lead to disappointing outperformed the diversified portfolio can also point to several less obvious outcomes. This is why diversification is of by a meaningful margin from 2006 to messages, some of which are quite crucial importance for the long term, not 2020, with a similar level of volatility. But powerful. In the remainder of this piece, just the short term. this asset class only represents around we will discuss three of these “hidden 2% of the global, investable equity and insights” from this chart. 2) Cash outperformed most markets in bond markets. Superior performance of volatile years such as 2008 and 2018, a narrow asset class or sector may be an 1) Diversifying is important for the but remaining invested was key to outcome of chance, even over a relatively long term, not just the short term. meeting investment objectives. long time horizon. In the case of high yield Listed private equity ranks 1st in four Market analysis and forecasts can easily debt, this strong performance may have different years, but for the overall period tempt investors to try to liquidate their been driven by one-off forces, such as an its rank is 6. Diversified portfolio’s best holdings just before a crash and try to increase in demand for high yield bonds, rank is 3rd in only one single year, its get back in at the lows. But a world in as the asset class gradually emerged overall period rank is 4, higher than listed which it is possible to time the markets into the mainstream. And while interest private equity. Why is this so? This is successfully and consistently would rates should stay low, we do not believe because with concentrated investments be paradoxical. In such a world, there they can fall much further over the next (such as investments in a specific wouldn’t be a risk premium to be earned, decade. On a forward looking basis, a sector, e.g. listed private equity) long and all asset classes would have the same multi-asset portfolio allows investors to term performance suffers from volatility return as cash. In the real world, building cast a wider net and capture a broader drag, whilst the diversified portfolio a diversified portfolio and remaining opportunity set, thereby minimising benefits from volatility reduction. As an invested (both in bad and good times) is unrewarded, idiosyncratic risk. the only reliable way of outperforming 12
Market Patchwork. Ann. 2020 Return 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD (2006- 2020.YTD) Listed Gov Bonds EM Hard Listed Listed Real Hedge Listed EM Equities Gov Bonds Listed DM Equities DM Equities Private 5.8% Currency Private Estate Funds 2.0% Private 37.8% 2.7% Private 11.7% 7.7% Equity Debt 43.9% Equity 15.9% Equity Equity 31.5% 37.2% 15.4% 46.6% Listed Real Investment Listed DM Equities Gov Bonds Gov Bonds High Yield Listed Cash 2.6% DM Equities EM Equities High Yield Estate Grade Private 27.4% 8.3% 1.3% Bonds Private 28.4% 10.5% Bonds 7.4% 20.4% Bonds 4.9% Equity 14.4% Equity 31.3% 26.1% EM Equities High Yield Listed Real Hedge Investment EM Hard Com- DM Equities Leveraged Listed Real Investment EM Hard 19.2% Bonds 4.1% Estate Funds 9.3% Grade Currency modities 23.1% Loans 0.5% Estate Grade Currency 28.7% Bonds 7.7% Debt 0.7% 13.3% 23.1% Bonds 7.6% Debt 6.7% Com- Leveraged EM Equities Diversified EM Hard Cash 0.4% EM Equities EM Local Investment EM Equities Hedge EM Equities modities Loans 1.5% 18.6% portfolio Currency 11.6% Debt 15.2% Grade 18.9% Funds 6.0% 6.5% 18.9% 8.6% Debt 7.2% Bonds (0.9%) EM Local Cash 0.4% High Yield High Yield DM Equities Listed Real Leveraged Diversified Hedge Diversified Gov Bonds Diversified Debt 15.7% Bonds Bonds 6.2% 5.5% Estate 0.1% Loans 10.1% portfolio Funds (1.1%) portfolio 5.4% portfolio 18.4% 14.2% 16.9% 6.4% High Yield Hedge EM Local Leveraged Hedge Investment EM Local Listed Real High Yield High Yield Diversified Hedge Bonds Funds (1.7%) Debt 16.8% Loans 5.3% Funds 5.0% Grade Debt 9.9% Estate 11.4% Bonds Bonds portfolio Funds 6.2% 14.5% Bonds (1.7%) 14.7% 5.3% (0.2%) Diversified EM Local DM Equities Listed Real High Yield DM Equities EM Hard Hedge EM Hard EM Hard High Yield Listed portfolio Debt (1.8%) 16.5% Estate 4.4% Bonds 3.4% (0.3%) Currency Funds 9.6% Currency Currency Bonds 5.0% Private 13.1% Debt 9.1% Debt (3.7%) Debt 14.5% Equity 5.8% DM Equities Diversified Diversified Cash 0.4% Diversified Leveraged Diversified EM Hard Listed Real EM Local EM Hard Investment 12.3% portfolio portfolio portfolio Loans portfolio Currency Estate Debt 13.5% Currency Grade Bonds (3.4%) 15.4% 2.9% (0.7%) 8.3% Debt 9.3% (4.7%) Debt 3.9% 5.3% EM Hard DM Equities Investment Investment Leveraged High Yield DM Equities High Yield Diversified Investment Leveraged Listed Real Currency (5.0%) Grade Grade Loans 1.6% Bonds 8.2% Bonds 7.8% portfolio Grade Loans 1.8% Estate 4.9% Debt 11.8% Bonds Bonds 0.0% (1.0%) (4.8%) Bonds 10.8% 12.5% Hedge Listed Real Leveraged Gov Bonds Cash 0.3% Listed Investment Investment EM Local Com- Cash 1.2% EM Local Funds 11.6% Estate Loans 9.6% (0.3%) Private Grade Grade Debt (6.2%) modities Debt 4.9% (5.8%) Equity Bonds 6.1% Bonds 5.7% 10.1% (1.7%) Leveraged Com- Hedge EM Equities Listed Diversified Listed Real Com- DM Equities Leveraged EM Local Leveraged Loans 10.1% modities Funds 7.3% (2.3%) Private portfolio Estate 5.0% modities (8.2%) Loans 8.6% Debt (0.3%) Loans 4.6% (8.0%) Equity (3.3%) 4.4% (0.1%) Investment EM Hard Gov Bonds EM Hard EM Equities EM Equities Gov Bonds Leveraged Com- Gov Bonds Listed Gov Bonds Grade Currency 4.4% Currency (1.8%) (14.6%) 3.9% Loans 4.1% modities 7.2% Private 4.3% Bonds 7.4% Debt (11.9%) Debt (6.0%) (8.9%) Equity (0.4%) Gov Bonds EM Equities Com- Com- EM Local EM Local Hedge Gov Bonds Listed Hedge Com- Cash 1.9% 3.6% (18.2%) modities modities Debt (5.7%) Debt Funds 3.0% 2.1% Private Funds 5.6% modities 2.9% (7.8%) (14.9%) Equity (8.3%) (12.7%) Cash 0.5% Listed Cash 0.8% EM Local Com- Com- Cash 1.1% Cash 1.4% EM Equities Cash 2.7% Listed Real Com- Private Debt (9.0%) modities modities (14.2%) Estate modities Equity (18.8%) (25.3%) (11.4%) (1.9%) (18.9%) Source: HSBC Private Banking as at 9 December 2020. Past performance is not a reliable indicator of future performance. Investment Outlook First Quarter 2021 13
Top Trends for 2021 1. Recharging Asia’s Growth Led by a strong rebound in China, opening and technological innovation to New Asian Consumer the Asian economy is poised to stay build a higher quality and more sustainable Asia’s digital transformation has seen ahead in the global recovery from economic growth model. China set the phenomenal acceleration during the the pandemic recession. Being the growth target to double its GDP per capita pandemic and we believe this structural first in and out of the COVID-19 crisis, income by 2035 and achieve high-income trend will gather further momentum after China has witnessed a broadening country status by the end of the five-year the crisis. When we look at what will recovery with the November Caixin plan. The new sustainable growth model recharge Asia’s growth in 2021, the rise manufacturing PMI hitting a new high will be supported by improvements of its middle class consumers and strong for the decade. Supported by robust in productivity, innovation, domestic private wealth growth stand out. middle class consumer demand, demand, environment protection, and high policy flexibility, effective virus social development. China’s focus on Asia’s more advanced technology containment and increasingly robust quality and sustainable growth goes infrastructure than other EM supports the IT infrastructure, Asia ex-Japan GDP is hand-in-hand with its long-term goal of rapid adoption of digital consumption and forecast to recover to 6.7% growth in achieving carbon neutrality by 2060. We automation. Our New Asian Consumer 2021 from -0.7% contraction in 2020. expect the new five-year plan will set theme focuses on opportunities in digital We see promising growth potential aggressive targets for development of consumer facing companies, healthcare in the digital consumer facing sectors electric vehicles and renewable energy and wellness providers. Despite the and attractive recovery opportunities for approval by the upcoming National outperformance of Chinese and Asian in industries which are re-emerging People’s Congress in March 2021. digital economy stocks in 2020, we remain from the economic reopening and positive on the growth outlook of leaders normalisation. The Regional Comprehensive Economic in ecommerce, online education, fintech, Partnership (RCEP) signed on 15 online entertainment and food delivery. Notably China’s 14th Five-Year Plan for November by 15 Asian economies marked 2021-2025 will kick-start a new economic a key milestone of trade liberalisation In Southeast Asia, digital consumption expansion cycle with the roadmap for the in the region. We expect the RCEP, the has recorded strong growth this year due next phase of structural reforms, market world’s largest free trade bloc covering to impact of the pandemic lockdowns. over 30% of global GDP, to further Southeast Asia added 40m new internet China’s 14th Five-Year Plan focuses entrench Asia’s role as the centre of global users in 2020 with one-third of the digital on quality growth and innovation. commerce and manufacturing. According service users coming online for the first to our forecasts, the share of the 15 RCEP time due to COVID-19. According to a members will rise to over 50% of global recent research conducted by Google, output by 2030. The largest beneficiaries Temasek and Bain, online spending in from RCEP are likely to be South Korea, Southeast Asia is projected to triple to Quality growth Japan, Malaysia, Thailand and China. more than USD300bn by 2025. We are With new structural growth engines, the bullish on ecommerce companies in cyclical recovery in domestic demand and the ASEAN region on the back of rapid 14th the tailwind from the global economic adoption of online consumption. Five-Year recovery, Asia should see multiple Plan investment opportunities in the equity Innovation and ‘Dual technology Circulation’ and credit markets. We continue to prefer upgrade strategy Asian equities and bonds over other EM markets and we stay overweight equities in China, South Korea and Singapore and Chinese credit in both hard currency and Source: HSBC Private Banking as of 9 December local currency. 2020. 14
Riding on China’s Five-Year Plan (FYP) healthcare and wellness providers. chain sectors which would benefit from We launched a new theme to ride Under the “Internal Circulation” strategy, strong policy support to accelerate on China’s 14th FYP with focus on China targets to build strong domestic digital transformation. We also favour opportunities from the “Dual Circulation” independent growth and promote prominent players in cloud technologies, strategy that pivots towards domestic technological innovation with focus data centers computer servers and consumption, technology upgrade, market on technology localisation and import 5G technologies. Another area that opening and financial liberalisation. Under substitution. To drive the creativity and China would like to further develop and the “Internal Circulation” strategy, China productivity gains in longer term, we achieve self-sufficiency is likely to be the is expected to accelerate the household expect China will significantly increase healthcare sector. Chinese biotech leaders registration system reform and rural land R&D spending to 3% of GDP for the new with cutting edge technologies and top reform and provide further support for FYP, up from 2.2% in 2019. talents could perform well with strong the rising middle class to boost domestic private and public funding support. The demand and household income. Higher Beneficiaries of the FYP include government’s strong policy focus on disposable income should bode well for domestic industry leaders in the fundamental and frontier research will the digital consumer facing companies, semiconductor, robotics, automation, boost education spending and support the smart manufacturing, and digital supply education sector. We expect consumption in Asia to rebound sharply in 2021 with new structural trends. 10.0 China Asia ex-China and Japan 8.0 6.0 4.0 Real consumption growth 2.0 0.0 (2.0) (4.0) (6.0) (8.0) 2015 2016 2017 2018 2019 2020F 2021F 2022F Source: HSBC Global Research forecasts, HSBC Private Banking as of 9 December 2020. Investment Outlook First Quarter 2021 15
Under the “External Circulation” strategy, China. This suggested that China is still China. Asian frontier markets, such as China will further accelerate financial gaining rather than losing global market Vietnam and Bangladesh, continue to market liberalisation and level the playing share due to strong competitiveness of its move up the value chain given lower field for local and foreign companies. We manufacturing supply chains supported labour costs, market liberalisation and expect the government to cut trade tariffs by the strengthening technological economic reforms. We expect China and allow more foreign investments into capability, strong industrial network to increase imports from the rest of various sectors. Further liberalisation of effects, well-established transportation Asia after signing the RCEP and this the onshore A-share and bond markets via and IT infrastructure, and a sizeable pool will provide an important catalyst to Stock and Bond Connect programmes, of skilled labour at a relatively low cost. accelerate Asia’s supply chains upgrade. together with global index inclusion and China’s global export share has climbed We anticipate the RCEP agreement will capital market reforms, should accelerate back to its earlier peak reached in early concentrate global supply chains further RMB internationalisation and bring new 2016 while many other Asian economies in Asia due to enhanced competitiveness opportunities to domestic and foreign are not far behind. of the region’s manufacturing base versus financial institutions and selected fintech the global peers and further expansion of leaders. We also favour companies with Geopolitical factors should continue intra-regional trade. significant exposure in Shenzhen, China’s to reshape Asia’s supply chains after Silicon Valley, and the Greater Bay Area COVID-19. President-elect Joe Biden’s Asian Credit Opportunities on the back of favourable government “Made in America” and “Build Back Positioning for the low yield world, we policies to build Shenzhen as a “model Better” plans indicate that he is likely to remain bullish on the theme of Asian city” and key growth engine with deeper maintain some protectionist measures Credit Opportunities due to the attractive integration with Hong Kong and Macau against China. We expect the Biden risk/return trade-off and substantial yield administration to promote onshoring pickup of Asian corporate bonds over Asia’s Supply Chain Revamp supply chains of industries of national developed market credit. The recent importance, like pharmaceutical products COVID-19 has caused unprecedented China SOE onshore bond defaults have and medical equipment and may continue disruptions to Asia’s supply chains, as added volatility in the credit market and to restrict technology transfer to China. closed borders, pandemic lockdowns pushed interbank lending rates higher. This could benefit Japanese, Taiwanese and transportation bottlenecks But we expect the market impact of the and Korean technology leaders as Beijing raised concerns about the risks of SOE defaults to be temporary, because is expected to revamp its supply chains by over-concentration of supply chains. we believe the government will attempt to reducing reliance on US technologies. Despite frequent market talk about put in place a more market-driven default massive supply chain relocation from mechanism for SOEs. This should help We highlight that ASEAN countries are China due to US-China tensions and restore financial discipline in the onshore geared beneficiaries of the RCEP as the COVID-19, the threat has remained more bond market by adjusting risk-reward free trade deal will unleash their growth rhetoric than reality. Chinese supply assumptions and contribute to more potential through trade liberalisation chains have proven surprisingly resilient efficient capital allocation in the long term. and improved outlook for foreign direct in withstanding the pandemic challenges, Within Asian credit, we stay overweight investment. We believe that RCEP as reflected by outperformance of Chinese hard currency and local currency can further deepen integration of the China’s exports and inward foreign direct bonds. Based on our base case scenario ASEAN countries into Asia’s supply investment flows against its main global that the US-China phase-one trade deal chains. Structural reforms in the ASEAN peers in 2020. In spite of geopolitical will hold and there will be no additional economies, such as the omnibus law in tensions between Washington and trade tariffs, we forecast RMB to stay Indonesia, should attract foreign direct Beijing, China’s exports to the US have firm at 6.60 against the USD by end-2021. investment inflows as producers are in posted a strong rebound in 2020 due A stable RMB supports our overweight search for lower operating costs and to robust US demand for medical and position on Chinese local currency bonds. diversification of supply chains from pandemic-related products made in 16
Investment Outlook First Quarter 2021 17
2. Digital Transformation 2020 has been volatile and far from wider range of products. This trend Why is the introduction of 5G noteworthy? predictable. However, as events has already reached its end game for A simple analogy would be the impact of unfolded, it has proven to be a products such as CDs, DVDs and to a the building of motorways in areas that watershed year, accelerating four key large extent books. previously only had simple country roads. trends that should boost activity and innovation, both in 2021 and in the But this is not the end of the story so to While 5G does not represent a huge longer term. Together, these trends speak. Just as book and record stores improvement on existing 4G technology create a step-change in the process of have largely disappeared from most high for consumers, it will immediately improve the world’s digital transformation. streets, and a few large online sellers three key aspects of the customer thought they dominated the market, experience: 1) network capacity, thereby Rise of the digital consumer technology has enabled consumers reducing slow or down networks; 2) Traditionally, the adoption of technology to access music and literature without improving download speeds, which is tends to be quickest with the younger owning the CD, DVD, book, magazine particularly important for streaming of generations, percolating more slowly or newspaper. The arrival of streaming movies and video services; 3) latency or to older generations, if at all. But the services is transforming the landscape response time, an important feature for the pandemic has forced all generations to yet again. New providers have entered growing online gaming community. become digital consumers as they have the market, whilst existing online stores no alternative. For example, retirees have have adapted quickly. For investors, it is These three improvements are important been slower to use online shopping even important to keep track and keep evolving in maintaining the momentum of the though they could potentially benefit with the market trends. trends we already mentioned in the substantially in the longer term. The silver consumer market. By comparison, there lining for the silver surfers of the pandemic Connectivity and 5G are other less well-known but more is that circumstance have forced them substantial benefits for industrial users, The rise of the digital consumer is driving online and they are quickly realising the where innovations have been waiting the need for ever better infrastructure to benefits of becoming more tech savvy. for the development of this key enabling facilitate the consumption of these new There is little joy to be had from hours technology. 5G is that technology that products and services. Originally, going lost with the weekly trudge to the local will facilitate the interconnectivity of online was through a personal computer, supermarket, only to return burdened machines and devices (Internet of Things), via a modem using existing fixed-line with heavy shopping bags in all sorts of and the development of augmented telephone copper wires and through an weather and often using public transport. and virtual services and products. This internet provider, with purchases paid A few clicks can avoid this thankless task. super-connectivity offers great potential via a credit card. In contrast today, the As these often older, wealthier generations for automation in both the home and in majority of purchases are from a mobile are coming online, it creates threats and the office as devices become part of a device, often paid from a digital wallet, opportunities for retailers: 1) as these network. These are just a few examples of with transactions taking seconds rather bulwarks of the high street shift online, the large potential that could be unlocked than minutes. This poses increasing many more retail outlets are likely to face by the introduction of 5G. For investors, demands on the infrastructure, particularly a bleak future, but 2) online sales from this 5G offers opportunities in the related mobile networks, and has driven the new wave of older, generally wealthier infrastructure, 5G devices and in any development and deployment of each buyers provide a new source of growth for company that sees the benefits of 5G to new generation of mobile networks. The retailers as buying becomes easier. outperform its competitors. fifth generation (5G) began its rollout at the end of 2019 in a handful of countries The trend for an ever higher percentage including China, South Korea, the USA Automation of consumer purchases to shift online and the UK. It happened at a slow pace The utilisation of autonomous or is unlikely to abate. It is likely to be initially as providers and consumers were semi-autonomous machines has been a self-perpetuating as high streets are both reluctant to invest in new hardware. feature for some time of the auto industry, hollowed-out, and choice there may However, recent upgrades to the 5G which is the largest single industry user become increasingly restricted. In technology together with a new range of of commercial robots. As the technology contrast, online stores have a far wider handsets may trigger a wider adoption. has advanced, so have its applications, but customer base and so are able to carry a this has been slow and somewhat limited. 18
The exponential increase in data usage raises the need for powerful and mobile connections through 5G. 450,000 400,000 350,000 global petabytes per month 300,000 250,000 200,000 150,000 100,000 50,000 0 1990 1994 1998 2002 2006 2010 2014 2018 2022 Source: Cisco, HSBC Private Banking as at 9 December 2020. Forecasts are subject to change. The virus outbreak has quickly changed the adoption of technologies, and much of the change is likely to remain with us. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Digitization of Digitization of Digitization of Automation Supply Chain Customer Channels employee interactions and AI Significantly Accelerated Somewhat Accelerated No change Somewhat Decelerated Significantly Decelerated Source: McKinsey survey of 800 executives, HSBC Private Banking as at 9 December 2020. Investment Outlook First Quarter 2021 19
Recent developments in AI, visual and automation. Meanwhile, in developed psychometric testing, video analysis and orientation technologies should accelerate markets, the growing desire to re-onshore robo-interviewing. It seems that an ever this, enabling more businesses to production may require automation to do smaller fraction of applicants will actually automate more aspects of the operations it in a competitive way. get to meet the employees of both in manufacturing and service the company. industries. This will be important for many Logistics is a big growth area for reasons including improving productivity, automation, and much of it is linked to rise Healthcare innovation quality, reliability, but also to address in online purchasing mentioned above. Healthcare is a final illustration of the demographic and societal shifts. Automated ordering and warehousing is step-change transition technology is better able to cope with large swings in bringing in our digital transformation. China’s dramatic manufacturing expansion seasonal demand. Automating the ‘final has been fuelled over the last three mile’ of the delivery chain is still a distant As healthcare costs continue to rise often decades by the steady flow of rural dream. In service industries, automated well above the rate of inflation in many migrants to urban centres, but the ebbing call centres and advisory bots are countries, the provision of the service is flow is driving up wages. Automation becoming a reality. A recent development becoming ever more unaffordable to both is addressing this cost challenge, while that has gained much ground during the governments, businesses and individuals also lowering business continuity risks. pandemic is the use of automation in the in its present form. As we rediscovered China is already one of the world’s largest hiring process of new employees. There in the pandemic, necessity opens minds investors in industrial robots, but its policy has been a surge in companies using to new approaches and gives an urgency of industrial upgrading requires ever more automated AI-based screening tools to developments that may help alleviate sophisticated levels of automation and provided by third parties, these include the unpleasantness. There are a myriad boosts domestic technologies related to online application automated scoring, 20
of examples of technologies that have or loathe, but it is also the fact that there they receive an alert. This will require the become particularly relevant during the are high costs associated with such patient to be connected to a network pandemic from vaccine development, visit even for simple routine out-patient both for the ongoing monitoring and mass screening, tracing apps to quick procedures. In addition, there are relatively the video call, a 5G network connect diagnostic tests. high cross-infection risks with hospital will allow the client to be full mobile at visits. Remote monitoring via sensors all times. The doctor may prescribe the However, there are also some less obvious placed on the patient may often provide a patient medicines via a digital script or technology-led developments, such as suitable alternative, for example, a patient prescription that is dispensed directly by telemedicine. It appeared as a niche, with cardiovascular conditions can now an online dispensary service that send the poor alternative to going to a surgery for easily have their heart rate, blood pressure medicines from its automated warehouse a “proper” consultation. However, online and other vital indicators monitored to the patient. The patient will pay for appointments are sufficient and efficient remotely. The other big advantage is that the consultation and medicine from their for both the doctors and patients. It monitoring can be done continuously digital wallet. This scenario is already an avoids unnecessary traveling to the with appropriate pre-set alerts sent to the existing reality today that is life changing surgery for the patient and the inevitable doctor and patient should their condition for many patients especially in rural areas, long delay as the doctor is behind need attention. but also brings better patient outcomes schedule. The pandemic has repositioned and improves productivity and lowers telemedicine as a viable alternative for The four areas that we chose to highlight costs. Because of the inter-relatedness many consultations. are not isolated but are to some extent of these innovations, they reinforce each inter-related. For the remote monitor other, push further innovation and Another related example is visiting example above, the doctor may first increase the profitability of the innovations hospitals, something most people dread consult the patient by video call when for investors. Investment Outlook First Quarter 2021 21
3. Recovering in a Low Yield World Cyclical improvement and a risk-on during this period, means that the trend is also means that central bank policy will tone in markets have driven safe largely structural in nature. need to remain very accommodative. haven bond yields higher in recent Governments will probably only be able weeks. But our view is that yield levels The great moderation: structurally low to grow out of their debt if bond yields will remain structurally low, and that inflation. We believe inflation is structurally remain low for a very long time. USD and EUR policy rates will remain capped by the impact of globalisation and unchanged in 2021. The search for technology. The labour market is global, This is topical because deficits have risen yield should thus continue, in bond and there is competition between workers significantly during the pandemic, and in markets, through dividend stocks in developed and emerging markets. The the US, President-elect Biden has signalled and REITs. The low yield environment online economy and automation help higher spending. But bond markets also supports interest rate sensitive slow wage inflation, and global trade should not worry, as taxes may also pick sectors, where we find interesting has increased competition between up, when the economy recovers, and a opportunities. firms. The internet allows consumers to gridlock in Congress means that some of shop around for the best price, reducing the administration’s spending plans may What the bond bears worry about. consumer price inflation. It is true that not materialise. When investors look at historical patterns, globalisation has peaked, but we think the economic recovery we expect to see that price competition in labour markets, Moreover, we note that during the credit in 2021 leads many to conclude that bond goods and services will remain very high, crisis, neither the higher debt, nor the yields may drift higher. What if central and that trade barriers will only have a mild ample central bank liquidity led to higher banks start to normalise policy, and would impact on inflation. Many companies who inflation. And even if inflation were to a normalisation be driven by interest see some of their input costs rise, may pick up to 2%, the Fed policy would not rate hikes, or by slower bond purchases be forced to absorb this in their margins immediately need to tighten, as it has (leading to some kind of taper tantrum)? and not pass it on to consumers, hence adopted an average inflation target of 2%. The bears will probably point to oil keeping CPI in check. So what about credit ratings? In recent prices in 2021 as there will be significant Credible central bank policy in DM years, we have seen a number of credit oil-price base effects, which may give and EM: clear central bank mandates, rating downgrades and negative rating the impression that inflation is starting to improved communication and market outlook changes for G7 countries. pick up. Indeed, if the Brent crude oil price guidance have helped reduce the markets’ However, this did not lead to higher bond were to remain at $45/bbl throughout the fears of inflation. Increased market yields or higher central bank policy rates. year, it would have a deflationary effect confidence lowers the real rate investors This reflects our view that there is no early in the year (when it is compared to demand on cash and government bonds. major debt sustainability issue in countries the $70/bbl level from January 2020) but like the US, Germany and the UK. become reflationary by the Spring (when Global ageing: ageing populations tend it will be compared to the $22/bbl level of March 2020). to save more for their retirement, and Investing in a low yield the savings surplus from countries like These are valid questions, but they overly China is being invested in financial assets, environment emphasize the cyclical and short term including bonds. As people age, they often prefer the more predictable cash In the low global yield environment, aspects, and largely ignore the structural flows of bond markets when compared to investors will need to pull out all the stops factors. It is because of the structural equity markets. to find enough income, while balancing factors that we stick to our flat Fed and the increased potential yield when going ECB policy rate forecasts, and our view High government debt and low yields further down the credit spectrum, against that safe haven bond yields should go hand in hand. The Japanese the increased risks. An important part continue to trade in a range. experience shows that high government of the strategy is to not hold large cash debt effectively reduces future growth balances, as they present an opportunity Low for much longer: the cost. Our top themes are as follows: as it limits governments’ scope for structural story discretionary spending. Lower trend US Treasury yields have been drifting growth in turn tends to lead to low policy EM debt – carry in a low yield down since the early 1980s. The fact that rates and government bond yields. environment: We believe that EM this trend has remained in place, in spite of Sovereign debt growth around the world corporate bonds in HC continue to offer a the ups and downs of the economic cycle good risk/return trade-off. 22
Our focus is on China, on Healthcare, The fall in safe haven government bond yields is a long term structural Media and Telecommunication and phenomenon. Financial companies, as well as Chinese 18% US 10- year Treasury yield Property Developers. 16% DM financials credit: The DM Financials 14% sector’s regime change since the Global Financial Crisis has caused banks to build 12% up significant capital buffers. COVID 10% will undoubtedly put the sector’s strong 8% fundamental footing to the test, but central bank liquidity and targeted fiscal 6% measures help. Our focus is on banks’ Tier 4% 2 bonds in USD and select Additional Tier 1 securities from banks with the highest 2% quality fundamentals. 0% 5 0 5 0 5 0 5 0 5 0 5 0 Resilient income: Investors are looking 6 7 7 8 8 9 9 0 0 1 1 2 n- n- n- n- n- n- n- n- n- n- n- n- Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja beyond the bond market and towards equities to find sources of income. We Source: Bloomberg, HSBC Private Banking as at 9 December 2020. Past performance is not a reliable indicator of future performance. remain selective in dividend stocks but believe that, some of the healthiest companies may start to raise dividends again. We also see opportunities in REITs but again point to the need to be selective, Most countries have seen their debt piles rise since 1980, but global bond yields with a focus on quality. have still fallen. 200 Canada France A recovery boosted by low interest rates: There are many signs that the low interest Germany Italy 180 rate environment is helping a number of Japan United Kingdom sectors, and speeding up the recovery. United States 160 Automotives have seen good demand in the US, and prices and optimism 140 have picked up in housing markets. Low Net Debt as % of GDP rates should support technology-related 120 stocks and avoid any sustained underperformance of growth stocks. 100 Focus on quality: The low interest rate 80 environment is largely structural, but also related to the uncertainty we have around 60 us. An improving cycle allows investors to broaden their stock selection, but we 40 note that some ‘value’ stocks can be value traps, i.e. companies with weak balance 20 sheets or outdated business models. Quality stocks may not outperform the 0 index in 2021, but they should still provide 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 a good risk/return tradeoff amid the Source: IMF World Economic Outlook, HSBC Private Banking as at 9 December 2020. Forecasts post 2019 uncertainty and volatility we expect. are subject to change. Investment Outlook First Quarter 2021 23
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