HSBC Global Private Banking (“HSBC GPB”) expects the beginning of Fed rate cuts in 03 2024, US soft landing, corporate earnings recovery, and solid Asia growth to improve global risk appetite and investment outlook of equity and Bond markets in 2024. For the next six months, HSBC GPB adopts a mild risk-on investment strategy with underweight on cash, mild overweight on US Treasuries and global investment grade bonds, and tactical overweight on hedge funds. Within its neutral positioning in global equities, it is overweight on US, EM Asia, and Latin American equities. Within Asia ex-Japan equities, it favours structural growth leaders and has a mild overweight position in India, Indonesia, and South Korea. It stays neutral on mainland China and Hong Kong equities with a focus on service consumption opportunities. It holds a bullish view on the US dollar due to support of high real yield, growth differential, and safe haven demand driven by geopolitical uncertainty.
Positioning for US Soft Landing, Fed Pivot, and Solid Asia Growth
“As we look ahead into 2024, we see two positive drivers supporting global financial markets. Major western central Danks have done with rate hikes amid continued disinflation and the US economy is heading for a soft landing. These two positive developments should support the recovery of global risk appetite in 2024. Amid slow global growth and a policy rate plateau in the next two quarters, putting cash to work in quality bonds, US and Asian equities and alternatives should deliver diverse sources of return and income to optimise portfolio performance and mitigate market volatility,” says Fan Cheuk Wan, Chief Investment Officer, Asia, Global Private Banl‹ing and Wealth, HSBC.
“We see quality bonds as the most attractive asset class for H1 2024 after significant repricing in the bond market in 2023. We focus on locking in attractive yields via our overweight in US and UK government bonds and investment-grade bonds across developed and emerging markets. Equity valuations now see better fundamental support from earnings recovery that we anticipate in 2024, which provides potential upside for stocks that can deliver on earnings expectations. We expect the global AI investment boom will extend into 2024, reinforcing our bullish view on the global, US and Asian IT sectors,” notes Fan.
“Our base case scenario factors in a soft landing in the US economy. Although global economic growth should be well below normal in 2024, the US growth engine continues to run, thanks to the resilient US consumer and government stimulus supporting investment and innovation in technology and healthcare. China‘s economic growth has been dragged by property sector challenges, but more decisive fiscal and monetary policy stimulus should put a floor under growth. We expect policy easing to support China GDP growth at 5.2% in 2023 and 4.9% in 2024,” highlights Fan.
Four Investment Priorities for H1 2024
(1) Extending bond duration ahead of policy easing
“The Fed has done with rate hikes and markets typically underestimate the pace of rate cuts when the monetary cycle turns. Rate cuts will hurt cash returns but should benefit bond market. We have extended our duration position ing to medium-to-long maturities (7-10 years) for US Treasuries and maintain our medium duration preference (5-7 years) for global investment grade corporate bonds,” says Fan.
(2) Broadening US equity exposure to benefit from soft landing:
“The US economy should continue to outperform the bearish consensus. High-tech valuations are warranted by strong structural growth and high return on equity in high-growth segments such as generative AI & robots and new energy transportation. We expect the US equity rally to broaden beyond technology with the support of the soft landing. We look for value in the industrial, healthcare, and consumer discretionary sectors through our themes on North American Re-Industrialisation, Healthcare Innovation, and American Resilience. We maintain our bullish view on the US dollar due to support of high real yield, growth differential, and safe haven demand driven by geopolitical tensions,” notes Fan.
(3) Hedging tail risks via alternatives, multi-asset and volatility strategies:
“Markets will continue to worry about cyclical, interest rate and geopolitical risks. A core allocation to private markets and multi-asset strategies can add diversification, while nimble hedge funds can take advantage of market volatility. Volatility strategies can help take a directional view on volatility or can be used to generate income to stabilise portfolios’ total returns,” Fan points out.
(4) Diversifying EM exposure into structural growth leaders
“Slow China growth, high USD rates and a strong USD will remain headwinds for EM asset classes, but we see increasing return dispersion due to growth divergence within EM. We favour markets with positive cyclical momentum and strong structural growth stories, with India and Indonesia standing out within Asia as they Benefit from supply chain diversification, the rise of middle-class consumers and young demographics,” states Fan.
“Going against the global headwinds, Asia‘s robust private wealth accumulation, resilient middle-class consumers, digital transformation and green transition offer solid domestic drivers to support healthy economic growth. We forecast Asia ex-Japan GDP to grow 4.5% in 2024, close to double the average gIoDaI growth of 2.3%. We capture the most attractive Asian growth opportunities from our investment themes under the Top Trend of Asia in the New World Order,” adds Fan.
“The relief from easing inflation provides Breathing space to the Asian central banks and consumers, allowing policymakers in most Asian economies to end the monetary tightening cycle. We forecast interest rate cuts in Australia, mainland China, Hong Kong, India, Indonesia, South Korea, the Philippines and Singapore in 2024. Within Asia ex-Japan equities, we favour structural growth leaders and hold an overweight position in India, Indonesia and South Korea. We stay neutral on mainland China and Hong Kong equities with more selective positioning on service consumption sectors,” notes Fan.
“We believe many compelling investment opportunities exist around the world despite the complex investment environment. We have identified five top trends which are reshaping the new world order. By better understanding these long-term structural forces, investors can avoid being blown off the course by snort-term market noise,” adds Fan.
Fan highlights the five top trends that will capture the most attractive opportunities in 2024:
- Asia in the New World Order: Capture compelling growth opportunities from supply chain reorientation, rising wealth and middle-class consumers, digital transformation and the green
- Disruptive Technologies: Focus on structural growth winners that Benefit from disruptive technological innovation including generative AI and robots, alternative fuels and the aerospace
- Climate Action: COP28 will further add momentum to the innovation of new green technology and green infrastructure and global investment in sustainable energy.
- Evolving Society: Focus on structural growth driven by urbanisation, healthcare, and social empowerment.
- Investing Ahead of the First Fed Interest Rate Cut: Opportunities are seen in the resilient US economy, US onshoring, quality credit markets and senior bank
Patrick Ho, Chief Investment Officer, North Asia, Global Private Banking and Wealth, HSBC, expects China‘s GDP growth to roughly go sideways as the property sector continues to be a drag on growth and more supportive policies should be forthcoming. “Given the low valuation, we also see select opportunities in Hong Kong and mainland China growth leaders in the service consumption, internet, and electric vehicle sectors,” adds Ho.
Top Trend of Asia in the New World Order — Q1 2024 High Conviction Themes
HSBC GPB recommends four top investment themes to capture the most attractive growth and income opportunities in Asia.
(1) Reshaping Asia’s Supply Chain
“This new theme focuses on Chinese and Asian industry leaders which have successfully diversified their supply chains to enhance competitive edges. We also like companies in India and ASEAN that benefit from the China+1 strategy,” highlights Ho.
“We launch this new high conviction theme, as the driving forces of geopolitical tensions, trade fragmentation and technology restrictions are accelerating global supply chain diversification across the region. Despite the supply chain reconfiguration trend, China retains its leading global export market share due to strong growth of high-value-added machinery products, EVs, consumer electronics and services exports. China maintains its central role in the global manufacturing supply chains as a dominant supplier of components to manufacturers in other parts of Asia,” adds Ho.
“To mitigate geopolitical risks and alleviate the impact of trade tariffs, western multi-national corporates implement the China +1 strategy by building new production facilities in India and ASEAN to supplement their supply chain in China. We identify geared winners in South Asia which gain from strong FDI inflows driven by supply chain reconfiguration,” says Ho.
(2) Rise of India and ASEAN
“We see promising secular growth opportunities in India and ASEAN, riding on the structural tailwinds from strong foreign and domestic private investments, young demographics, the technology boom and green transformation. India has consistently delivered stronger-than- expected growth in manufacturing and service activities throughout 2023, with strong FDI inflows and Dooming services exports powering employment, private consumption and productivity gains,” says Ho.
“Indonesia offers one of the best growth and investment stories in Asia, supported by its large, young and growing population, with rapid urbanisation and robust private consumption being the key growth engine. Indonesia further benefits from upgrading of its manufacturing value chain. The country‘s abundant reserves of green minerals and metals are vital inputs for the EV and battery industries. Indonesia holds the world‘s largest nickel reserves with an estimated 21 m tonnes or 22% of global reserves,” notes Ho.
(3) Future Asian Consumer
“Driven by rising Asia wealth and middle class consumers, Asia‘s consumer discretionary sector stands out as a bright spot, including select Chinese internet leaders, Asian consumer discretionary companies, Al-driven and digital consumption and Asian financial services providers,” says Ho.
“Our new high conviction theme focuses on the consumer discretionary sector which is projected to deliver 19% earnings growth in 2024 despite the high comparison base this year,” notes Ho.
(4) Capturing Peaking Asian Yields
“We focus on locking in compelling yields from quality Asian bonds. We favour Asian financials, Indian local currency bonds, Indonesian quasi-sovereign IGs, Korean IG bonds, Macau gaming and Chinese TMT credits. The all-in yield of the Asian IG bond index is attractive at around 6.3%, well above the 3-year average of 4.5%,” says Ho.
“Disinflation is on track in most Asian economies, with inflation now expected to return to central bank target ranges in 2024 in most countries, well ahead of most other regions. We believe Asian yields are peaking and expect policy rate cuts in Australia, mainland China, Hong Kong, India, Indonesia, South Korea, the Philippines, and Singapore in 2024. Monetary easing of Asian central banks will bring policy tailwinds for the Asian bond markets in the coming year,” adds Ho.
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