Top of main content

HSBC Jade Perspectives Q3 2020

08/07/2020
Coronavirus
Equities
Investment
US
Fixed income

Cautious now, but hopeful for the future

HSBC Jade Perspectives is a publication specifically created for our Jade clients. It explores the key global themes relevant to today’s investors, while explaining their diverse implications.

When our last issue was published, stocks had crashed as investors digested the implications of the COVID-19 crisis. As we write, the US stock market is trading at levels similar to before the COVID-19 selloff, having rallied over 30% since the lows experienced in March.

And yet the near-term economic outlook is uncertain, the viability of many jobs remains unclear, and perhaps most importantly, the pandemic is far from over and further waves of infection can’t be ruled out.

So why are markets so bullish? We believe there are three main reasons:

Firstly, investors are being driven by short-term sentiment. Despite the uncertain economic outlook, there’s still more good news than bad at present, with businesses starting to open again and hopes of a breakthrough in virus treatment or vaccine development. Governments are also determined to prevent a full-blown depression by implementing a broad range of economic support packages.

Secondly, due to unprecedented policy support, interest rates are at record lows (and occasionally negative), making government bonds and cash less attractive than ever. In most markets, yields on these assets are below inflation, meaning that the holder’s purchasing power diminishes over time. This strengthens the case for stocks and other higher-yielding investments.

Thirdly, the stock market has been powered by companies benefitting from the crisis. With more people working from home, collaborating via meeting apps and entertaining themselves with videoon- demand, a set of behaviours that were already on the rise are now deeply entrenched. As a result, companies that offer these services, or which provide vital technology infrastructure, have prospered. It’s no surprise that the US technology sector has spearheaded the rally (see more on page 18).

As behaviours continue to evolve, what kind of “new normal” are we heading for? A return to life “exactly as it was” before the crisis feels increasingly unlikely. Businesses, particularly in retail and hospitality, must find ways of adapting to a socially-distanced world, at least for the foreseeable future. Geopolitical risks are another consideration becoming more prevalent, and Environmental, Social and Governance (ESG) factors are increasingly more resonant in the world around us.

Investors will need to navigate all this, along with the challenge of a zero-interest-rate environment. Diversification will be key but they will also need to reconcile themselves with the possibility that returns on their investments could be lower in the coming years (see more on page 16).

We aim to address all these topics, both in this issue and in our broader suite of publications. We hope you and your families are staying safe and wish you a successful and resilient investment journey ahead.

Positioning your portfolio for the next quarter

Source: Refinitiv Datastream, 02 Jul 2020.

Investment involves risks. Past performance is not indicative of future performance. For illustrative purpose only.

A journey beset with uncertainties

Despite positive early indicators as economies begin to reopen (see the chart on the left), the speed of the recovery will depend on uncertainty around the continued spread of the virus and the availability of a treatment or vaccine.

While social distancing, travel restrictions and other necessary measures remain in place, recovery may take still longer than expected, with significant economic and financial consequences.

Source: HSBC Global Research, Apr 2020.

Downgrades in 2020; more hopeful for 2021

We expect global GDP to fall by 4.8% for the year as a whole – more than double the 2.2% drop seen in 2009 after the global financial crisis. Uncertainty is toxic to the economy. US GDP fell by 5% in Q1 this year, with a steeper decline expected in Q2. Record unemployment is likely to have a lasting impact on the economy, with many businesses already struggling.

Looking ahead, we are hopeful of a recovery and expect a rebound towards year-end as economies start to reopen, followed by 5.9% growth in 2021.

Source: Refinitiv Datastream, 30 Jun 2020. Index used: S&P 500 index.

Investment involves risks. Past performance is not indicative of future performance. For illustrative purpose only.

Equities have rallied since March

Stock markets have rebounded, thanks to an improvement in market sentiment that belied the unsettling economic fundamentals. Leading businesses in pivotal sectors like technology have driven the market rebound.

Still, given an uncertain recovery path ahead, investors should be cautious and maintain a neutral allocation to risky assets, while remaining ready to take advantage of select opportunities. We hold a neutral view on equities and corporate bonds for the short term.

Source: HSBC Global Asset Management. Index used: MSCI Daily Total Return Gross World Index.

Investment involves risks. Past performance is not indicative of future performance. For illustrative purpose only.

Staying invested can yield rewards

Historically, post-recession recoveries in financial markets have tended to be powerful. In 2009, two months before economic data began to improve, global equities had already risen by around 40%*. Missing out on a bounce-back can be costly, so it’s important to stay invested even through turbulent times.

Those who can stay invested in this crisis may be rewarded for the long term. Selectivity is key. Companies that can adapt and grow in a recession often prove to be attractive longterm investments.

*Source: Refinitiv Datastream. Index used: MSCI AC World Total Return

Index. Past performance is not indicative of future performance.

Source: Refinitiv Datastream/Fathom Consulting, 30 Jun 2020.

Investment involves risks. Past performance is not indicative of future performance. For illustrative purpose only.

Asian equities offer long-term potential…

We remain positive on equities for the longer term, especially in Asia (excluding Japan). Markets like China and South Korea are leading the recovery, with recent statistics showing a clear “back-towork” dynamic, as well as potential for more policy support.

Certain growth stocks, particularly in the technology sector, may benefit from changing consumer behaviours such as the increased demand for digital services due to the pandemic, which has accentuated existing trends for remote working and content streaming.

Source: Refinitiv Datastream/Fathom Consulting, 30 Jun 2020.

Investment involves risks. Past performance is not indicative of future performance. For illustrative purpose only.

…as does Asia fixed income 

In general, we favour investing in assets from regions with solid demographic trends offering significant long-term opportunities. For example, Asia has a growing affluent society that will consume more and provide solid investment opportunities for years to come. Generally speaking, Asia also benefits from having more ammunition to stimulate economic growth compared to some Western counterparts.

We’ve upgraded investment grade and high yield bonds where spreads have become attractive. These investments are also well supported by recent commitments from some central banks to purchase these assets as part of a broader programme to combat the economic downturn.

Source: Refinitiv Datastream/Fathom Consulting, 30 Jun 2020. R – the Republican Party, D – the Democratic Party.

Investment involves risks. Past performance is not indicative of future performance. For illustrative purpose only.

Potential threats are looming

COVID-19 has changed the geopolitical backdrop considerably. The rising China- US tensions, the upcoming US elections, along with key milestones for Brexit, could also weigh on market sentiment and trigger episodic volatility.

The US presidential election can have a major impact on policy, laws and foreign relations, moving market sentiment. For long-term investors, the key thing is to stay invested and diversify holdings.

Source: Refinitiv Datastream, data as of 30 Jun 2020. Core bonds: Bloomberg Barclays Agg bond index. Financial

crisis: 10/10/2007 – 09/03/2009; US credit rating downgrade: 25/07/2011-03/10/2011; Energy and EM downturn:

21/07/2015-11/02/2016; Fed policy reaction: 03/10/2018-24/12/2018; COVID-19 crisis: 01/01/2020-31/03/2020.

Investment involves risks. Past performance is not indicative of future performance. For illustrative purpose only.

“High quality” bonds could be a useful diversifier

Although we don’t strongly favour “safe haven” government bonds right now, we acknowledge that a mix of high quality government and investment grade bonds plays a crucial role in portfolio diversification. In particular, we have upgraded investment grade corporate bonds for the long-term because of their comparatively more attractive yields and relative stability.

It’s vital to plan for volatility and insulate your portfolio against ongoing political risk. A diversified, multi-asset portfolio is a great way of doing this.

This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document is distributed and/or made available by HSBC Bank Canada (including one or more of its subsidiaries HSBC Investment Funds (Canada) Inc. (‘HIFC’), HSBC Private Wealth Services (Canada) Inc. (‘HPWS’), HSBC InvestDirect division of HSBC Securities (Canada) Inc. (‘HIDC’)), HSBC Bank (China) Company Limited, HSBC France, HBAP, HSBC Bank (Singapore) Limited and HSBC Bank Middle East Limited (UAE), HSBC UK Bank Plc (collectively, the “Distributors”) to their respective clients. This document is for general circulation and information purposes only.

The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. HBAP and the Distributors do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein have been sourced from HSBC Global Asset Management at the time of preparation, and are subject to change at any time. These views may not necessarily indicate HSBC Global Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Investments are subject to market risks, read all investment related documents carefully.

This document provides a high level overview of the recent economic environment and has been prepared for information purposes only. The views presented are those of HBAP and are based on HBAP’s global views and may not necessarily align with the distributors’ local views. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Before you make any investment decision, you may wish to consult a financial adviser. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether the investment product is suitable for you. You are advised to obtain appropriate professional advice where necessary.

We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.

Important Information about HSBC Global Asset Management (Canada) Limited (“AMCA”)

HSBC Global Asset Management is a group of companies that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings plc. AMCA is a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.

Important Information about HSBC Investment Funds (Canada) Inc. (“HIFC”)

HIFC is the principal distributor of the HSBC Mutual Funds and offers the HSBC Pooled Funds through the HSBC World Selection Portfolio service. HIFC is a subsidiary of AMCA, and indirect subsidiary of HSBC Bank Canada, and provides its products and services in all provinces of Canada except Prince Edward Island. Mutual fund investments are subject to risks. Please read the Fund Facts before investing.

Important Information about HSBC Private Wealth Services (Canada) Inc. (“HPWS”)

HPWS is a direct subsidiary of HSBC Bank Canada and provides services in all provinces of Canada except Prince Edward Island. The Private Investment Management service is a discretionary portfolio management service offered by HPWS. Under this discretionary service, assets of participating clients will be invested by HPWS or its delegated portfolio manager in securities, including but not limited to, stocks, bonds, pooled funds, mutual funds and derivatives.

Important Information about HSBC InvestDirect (HIDC)

HIDC is a division of HSBC Securities (Canada) Inc., a direct subsidiary of, but separate entity from, HSBC Bank Canada. HIDC is an order execution only service. HIDC will not conduct suitability assessments of client account holdings or of the orders submitted by clients or from anyone authorized to trade on the client’s behalf. Clients have the sole responsibility for their investment decisions and securities transactions.

We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.

THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION.

YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.

© Copyright 2020. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. 

No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.