LONDON — HSBC Asset Management has told investors to prepare for the “mission economy” and an important shift in the macro regime.
In its mid-year outlook report, seen exclusively by CNBC, the British lender said investors need to prepare for the business cycle to transition from recovery to expansion, bringing a period of lower investment returns and a shift toward “activist” fiscal policy.
Gross domestic product has recovered from the Covid plunge in the U.S., China and across industrial Asia and corporate profits are experiencing a V-shaped rebound, with 2022 earnings expectations now ahead of pre-Covid forecasts.
This has led monetary policy debate toward timetables for tapering of quantitative easing programs, and HSBC suggested that this indicates that we are entering the mid-cycle, expansion phase of the business cycle.
“After a period when rising investor optimism lowered perceptions of risk and re-rated risky asset classes, the outlook is now the reverse,” Joseph Little, global chief strategist at HSBC, said.
“Increasingly, valuations are set to become a drag on returns as a lot of good news about the recovery has already been factored into prices.”
Little said value stocks — those which trade at a discount relative to their financial fundamentals and performance — continue to make sense against a backdrop of rising bond yields.
“We favour cyclical markets like the UK, Europe, and deep value EMs, while remaining nimble in allocations,” Little said.
“The downside cyclical risk is the U.S. dollar, which is particularly important for our strategy favouring international equities and EM fixed income.”
The ‘mission economy’
Alongside the cyclical transition to expansion, the shift in policy consensus in advanced economies is now reflecting a greater degree of “fiscal activism.”
Little characterized this as both cyclical, with “a greater use of automatic stabilisers and furlough programmes in recession,” and structurally, with green and socially inclusive medium-term growth now being prioritized.
“The old risks of the 2010s are replaced with a new set of challenges: higher taxes, inflation and a more empowered labour market. We are already seeing a significant degree of ‘mission-ness’ in the U.S. and Chinese policy agendas,” Little said.
“The most fundamental rethink for portfolios should focus on the role government bonds play. As the balance of economic risks shifts, bonds are destined to lose their claim to being cheap hedges.”
bonds are destined to lose their claim to being cheap hedges.”
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While acknowledging that there is no “silver bullet” solution, Little suggested investors look for new portfolio diversifiers within a broader universe of alternative asset classes.
“Investors should look to get as close to real, inflation-protected cash-flows as possible. Infrastructure debt is a strong candidate for that and has delivered decent historic returns, offers a higher spread today than global credit, and has a more benign loss profile,” he said.
Copper and minerals such as uranium or rare earth metals are also attractive, HSBC believes, along with carbon offsets.
“A more conventional allocation would be to look to Asian bonds as a substitute for global bonds, or Asia high-yield credits which benefit from higher spreads and lower default rates,” Little said.
