Top Questions from our Clients - December 2023

by Chief Investment Office, HSBC Global Private Banking & Wealth

Dec 7, 2023

Question 1: How does the US economy remain resilient despite its high levels of debt? The US economy is set to slow cyclically after the most aggressive monetary policy tightening cycle in over 40 years. But unemployment remains near 60-year lows, wages are rising, and real disposable income is growing. Secular themes like emerging technology, innovation in healthcare and other sectors, and re-industrialisation of the US should provide tailwinds for US economic growth next year. Government debt issuance may remain elevated through the middle of Q1 2024 before returning to normal. The peak in rates presents an opportunity to capture and lock in higher yields for longer. In the credit IG space, we focus on quality companies. Historically speaking, US equities should outperform most global markets post the Fed pause
Question 2: Will EM central banks cut rates more aggressively than DM central banks? Inflation has come down in most of the Asian EM markets. However, concerns remain due to elevated commodity and food prices, along with volatility in oil prices. We believe most EM central banks are done with rate hikes, but rate cut timelines might differ due to varying growth and inflation outlooks. Hence, we don’t expect sharp divergences in rate cut trajectories for EM and DM central banks and maintain a mild overweight on EM Asia equities, with a preference for India, South Korea and Indonesia
Question 3: Is the recent Chinese disinflation a sign of weak demand in the economy? Can positioning in Indian and ASEAN markets provide attractive risk rewards? China's softer inflation print numbers in October indicate that headwinds for its growth recovery remain, and policy interventions are yet to filter through. Headline CPI declined 0.2 per cent y-o-y due to a drop in food and fuel prices, and core CPI edged down to 0.6 per cent y-o-y, highlighting domestic consumption remained relatively stable. While PPI deflation came in at -2.6 per cent y-o-y due to downward movements in global commodity prices and muted end-demand. As such, investors could continue to take a wait-and-see approach. We position in India and ASEAN markets due to their attractive risk rewards. We hold a mild overweight on Indian equities with a large-cap bias and are bullish on India's local currency bonds. We highlight the opportunities in the region through our trend “Asia in the New World Order”
Question 4: How can we position our portfolio ahead of the Fed rate cuts expected in 2024? We expect the Fed to cut policy rates by 50bps, beginning Q3 2024. But with current economic numbers, markets expect the FOMC might cut more aggressively. A large chunk of US government debt, around 31 per cent of the total outstanding, will mature in 2024, and lower rates will help ease some marginal pressure on the deficit. Also, the affordability of already struggling residential and commercial real estate sectors will welcome lower rates. In US equities, we maintain our overweight in technology but broaden our exposure to other opportunities via our North American Re-Industrialisation, Healthcare Innovation and American Resilience themes. In fixed income, the peak in rates presents an opportunity to capture and lock in higher yields for longer
Question 5: Can equity markets deliver higher returns vs. cash/bonds in the short term (two years)? We argue yes—it is still worth holding equities because it still pays to do so. The present one-year earnings yield of the global equities is higher than the bond yields in all major developed bond markets. Even cash rates that approach six per cent are unable to match up. And after considering inflation, equities’ yield further climbs relatively higher. However, this approach expects equity prices to move in line with earnings and earnings to at least remain stable during the next two years. A recession can easily derail this, and market volatility can overshadow equities' higher yield. Hence, we prefer US markets due to their better earnings growth outlook and lower risk of recession. We also focus on quality stocks that can weather potential downturns better than most
Question 6: Oil prices have fallen rapidly in recent weeks despite the unresolved Middle East conflict. What are our views? After climbing to a one-year high in mid-September, global oil prices have faced increased pressures. The surge in geopolitical risk premium following the Middle East conflict was reflected in oil prices, but it proved to be short-lived. We believe this was because concerns shifted from the conflict to the fundamentals of oil markets amid prospects of slowing global growth and, thereby, weaker oil demand. Hence, we maintain our neutral view on oil, hedge the risks of oil price surges by mild overweight in the energy sector and complement our portfolios with alternatives, multi-asset and volatility strategies

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