HSBC Private Banking publishes its investment outlook for 2022

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Willem Sels, Global CIO, Private Banking and Wealth Management at HSBC has commented on the key macro-economic themes as the global economy moves from the reopening to the mid-cycle stage. 

“As we move into 2022, the economy has moved from the reopening to the mid-cycle stage. In the mid-cycle, equity market returns typically slow but remain respectable, and volatility picks up,” he says.

“At the same time, policy is transitioning. Some central banks have started tapering, while the US Fed and the Bank of England should soon start to hike rates. On the fiscal side as well, we should see the start of some tax hikes and less fiscal support than during the pandemic.

“That said, both fiscal and monetary tightening will be gradual. Central banks agree with us that inflation will come down some time in 2022, and hence, the four rate hikes we expect from the Fed between June 2022 and September 2023 are somewhat slower than what we’ve historically seen.

“Inflation will come down some time in 2022. Central banks agree with us on this, which should limit the need for very rapid action. Simultaneously, governments will try to avoid the backlash to austerity that followed the Great Financial Crisis and keep investing in priorities such as healthcare and infrastructure.
“That gradual approach should allow economic and earnings growth to continue, and keep bond yields low. Any transition, however, comes with some execution risk and the likelihood of more market volatility, especially given the considerable uncertainty around the timing of the fall of global inflation and the potential for further COVID waves.

“Policymakers are also planning a big reset for the global economy, together with the world’s CEOs, investors, voters and consumers. Clearly, the sustainability revolution is the biggest project of all. We believe sustainability should be part of both the core portfolio and investment thematics, to manage risks and exploit opportunities, and before we invest in any company, we need to understand where they stand on all ESG aspects. We are already seeing evidence of companies participating in the big reset, as capex is picking up, and companies put some of their bumper cash positions to work.”

Reflecting on the outlook, Sels explains that HSBC Global Private Banking has become more selective in country, sector and stock picks, focusing on areas with strong support, which warrant the valuation multiples.

“We remain positive on equities, even though the slowdown means that we have reduced the cyclicality of our sector exposure. We have also become more selective in the geographies we are exposed to. The US remains our principal stock market overweight due to the resilience of the US economy and its quality style bias. We are also overweight Eurozone stocks, as its economic recovery is lagging and therefore still has good momentum behind it, whilst also being supported by the EU Next Generation fund investments.

“By contrast, we cut UK stocks to neutral this quarter due to the planned rate hikes and fiscal tightening and remain neutral on China as investors want more policy clarity. Till then, we invest in our long-term high conviction themes, and diversify within Asia. Elsewhere, we are underweight Latin America and emerging market EMEA as we believe commodity prices will start to plateau.”

“Uncertainty around the labour market is one reason why both the US Federal Reserve and Bank of England recently said they want to adopt a wait-and-see attitude and a slow approach to monetary policy normalisation. That should anchor Treasury yields, but market nervousness around the outlook should make those yields volatile.

“We therefore expect to see a ‘low but volatile’ Treasury environment, with 10-year yields in a broad 1-2 per cent range. To manage our fixed income risk amid the expected volatility, we have cut emerging market local currency bonds to neutral, as they are the most volatile sub-asset class within fixed income. We remain neutral on Chinese hard currency bonds and focus on longer-term themes.

“We think that in 2022, markets will continue to see periods of optimism and pessimism on both inflation and growth, and flip-flop between those views until there is more clarity. As market opinion shifts back and forth, there will be periods of outperformance of cyclicals over defensives, and value over growth, but other periods where we get the opposite.

“Timing this will be near impossible and could be counterproductive. But it should create a lot of opportunities for hedge funds to exploit. We are overweight hedge funds to diversify our portfolio, which is important in a year where we expect more volatility and lower returns for equities. We particularly like macro, multi-strategy, event-driven and distressed strategies as they should be well positioned to take advantage of the differences between countries’ positioning in the cycle, relative market valuations, the M&A and credit default cycle, and companies’ competitive positioning in a rapidly changing world.”
 

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