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HSBC Jade Perspectives Q3 2020

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.

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