Rebalance Your Portfolio As The Economy Expands, According To HSBC
Traders on the floor of the New York Stock Exchange.
LONDON – HSBC Asset Management has asked investors to prepare for “mission economics” and a big shift in the macro regime.
In its mid-year outlook report, seen exclusively by CNBC, the UK lender said investors should prepare for the business cycle transition from recovery to expansion, resulting in a period of lower return on investment. and a shift towards an “activist” fiscal policy.
Gross domestic product has recovered from the fall in Covid in the United States, China and across industrial Asia, and corporate profits are experiencing a V-shaped rebound, with profit forecasts for 2022 now higher than pre-Covid forecast.
This has led the monetary policy debate towards timetables for phasing out quantitative easing programs, and HSBC has suggested that this indicates that we are entering the mid-cycle expansion phase of the business cycle.
“After a period where growing investor optimism has reduced perceptions of risk and reassessed risky asset classes, the outlook is now reversed,” said Joseph Little, chief global strategist at HSBC.
“Increasingly, valuations should become a drag on returns, as a lot of good news about the recovery has already been reflected in prices.”
Little said value stocks – those that trade at a lower price than their financial fundamentals and performance – continue to make sense amid rising bond yields.
“We favor cyclical markets like the UK, Europe and high value-added emerging markets, while remaining nimble in allocations,” said Little.
“The downside cyclical risk is the US dollar, which is particularly important to our strategy favoring international equities and emerging market fixed income securities.”
Along with the cyclical transition to expansion, the shift in political consensus in advanced economies now reflects a greater degree of “fiscal activism”.
Little called this both cyclical, with “greater use of automatic stabilizers and recession leave programs”, and structural, with green and socially inclusive medium-term growth now a priority.
“The old risks of the 2010s are being replaced by a new set of challenges: higher taxes, inflation and a more empowered labor market. We are already seeing a significant degree of ‘mission-ness’ in US policy agendas. and Chinese, ”he added. mentionned.
“The most fundamental overhaul of portfolios should focus on the role government bonds play. As the balance of economic risks changes, bonds are doomed to lose their pretense of being cheap hedges. “
While acknowledging that there is no silver bullet, Little suggested investors look for new portfolio diversifiers within a larger universe of alternative asset classes.
“Investors should be looking to get as close as possible to real and inflation-protected cash flow. Infrastructure debt is a strong candidate for this and has generated decent historical 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, as are carbon offsets.
“A more conventional allocation would be to look to Asian bonds as a substitute for global bonds, or high yield Asian credits that benefit from higher spreads and lower default rates,” Little said.