The global order is rapidly fragmenting, signaling a “new paradigm” in financial markets, according to HSBC Asset Management. This shift is accompanied by heightened recession risks, prompting an increased focus on bonds. In its 2024 investment outlook, HSBC underscores the significant risks posed by tight monetary and credit conditions, leading to a potential adverse growth shock that markets may not be fully equipped to handle. Amidst these challenges, the analysis points to a potential fall in U.S. inflation towards the Federal Reserve’s 2% target in late 2024 or early 2025, with other major economies following suit. The report highlights that global central banks, including the Fed and the European Central Bank, are likely to cut rates to combat the economic headwinds, while the Bank of England is expected to lag behind its peers in taking necessary action.
HSBC Asset Management identifies three major factors contributing to the new paradigm in global markets. Firstly, the world is experiencing a shift toward a “multi-polar world” and an increasingly fragmented global order, indicating the end of hyper-globalization. This change is driven by geopolitical factors and changing dynamics of international cooperation. Secondly, fiscal policy is expected to become more active, influenced by shifting political priorities, environmental concerns, and rising levels of inequality. Lastly, economic policy is increasingly centered around addressing climate change and transitioning to net-zero carbon emissions. These factors collectively contribute to greater supply-side volatility, structurally higher inflation, and higher-for-longer interest rates.
HSBC AM suggests that over the next 12 to 18 months, investors should closely scrutinize corporate profits, the ongoing debate on the “neutral” rate of interest, and labor market and productivity trends. While current market expectations reflect a “soft landing” scenario, in which central banks successfully bring inflation back to target without triggering a recession, HSBC AM believes that the risks of a recession are being overlooked. Consequently, the firm is positioning for defensive growth and shares the prevailing view that bonds are poised for a comeback. HSBC AM sees opportunities in selected areas of global fixed income, including the U.S. Treasury curve, core European bond markets, investment-grade credits, and securitized credits.
HSBC Asset Management exercises caution when it comes to U.S. stocks due to high earnings growth expectations for 2024 and a stretched market multiple. In contrast, European stocks are viewed as relatively cheap on a global scale, which limits their downside unless a recession materializes. Japan, on the other hand, is seen as an outperformer among developed markets, thanks to attractive valuations, the conclusion of unconventional monetary policy, and a high-pressure economy. For emerging markets, the firm recommends a selective approach based on corporate fundamentals, earnings visibility, and risk-adjusted rewards. If the market’s expectations of significant rate cuts by the Fed materialize, HSBC AM highlights Indian and Mexican bonds, as well as Chinese A-share stocks, as top emerging market picks.
Diversification is emphasized as a crucial strategy in the evolving global market context. HSBC AM highlights India’s post-pandemic rebound and rapidly growing markets, as well as Japan’s continued exit from unconventional monetary policy, as attractive sources of diversification. China’s projected growth and the potential for further fiscal policy support also make it an appealing market. Additionally, Asian equities are perceived to be in a stronger position due to their growth prospects, attractive valuations, and the light positioning of foreign investors. Stabilizing earnings are expected to be the primary driver of returns in the region.
The report concludes with a positive outlook for Asian credit, predicting a favorable year ahead. This positive sentiment is attributed to the anticipated peak in global rates, strong performance of regional economies, and potential fiscal boosts from Beijing. HSBC AM believes that Asian credit will benefit from these factors, leading to improved returns for investors in the asset class.
HSBC Asset Management’s analysis sheds light on the changing landscape of global markets. It highlights the fragmentation of the global order, the factors contributing to the “new paradigm,” and its implications for investors. With a cautious approach to equities and an emphasis on diversification, investors must navigate these evolving dynamics to seize selective opportunities and mitigate risks in a rapidly transforming financial landscape.