LONDON — HSBCAsset Management shares a wealth of information with clients who are trying to get around the “wall of fear” that is currently affecting global markets. 

Investors have a lot to consider when allocating money. There are concerns over global growth and inflation, as well as the possibility of central bank policy changes and the revival of Covid-19 in some parts of the globe. 

Joe Little, HSBC Asset management Global Chief Global Strategist, recommended a variety of strategies to clients in a message earlier this week. These included looking at Asian fixed-income, reasonable priced inflation hedges, and value stocks and cyclical shares. 

The consensus forecasts for U.S. 2020 GDP [gross domestic product]According to HSBC’s aggregate data, inflation expectations for the U.S. in 2021 have risen by a full percentage to 4.3%, while their forecasts of a 0.6 percentage point reduction to 5.9% were reduced.

The outlook for China’s 2021 growth in GDP has been lowered to 8% by economists (from 8.6% previously forecasted for 2021). Little also noted that third quarter was more difficult for all emerging market assets.

The outlook is dependent on the impact of inflation and growth on the price anxiety. “Covid-19 and supply chain disruption will be problems,” he stated. We expect that these factors will delay rather than hinder the recovery. However, the policy background could impact the outlook on growth.

Recovery – “Twin-tracked”

HSBC predicts that major economies’ GDP will grow between 4% and 5.5% in 2022. The U.S., Europe, and China are at the bottom of this range, while the U.K., and China, sit at the top. Between 2-3% inflation is predicted.

There is significant divergence outside of main economies. Many emerging markets and frontier economies are lagging – which all suggests the global recovery is on twin tracks,” he added. 

Little said that the environment was favorable for emerging market fixed-income, however he cautioned clients to remain sensitive to dollar outlooks and to this more “twin-tracked” recovery. 

He stated that the Asian fixed income was still our most preferred risk-adjusted wager in this region. 

“Low-for–long interest rates” 

While labor markets broadly continue to improve — weekly U.S. jobless claims hit a new pandemic-era low of 290,000 last week, compared to 6.15 million in April 2020 — HSBC prefers stocks to bonds, despite equity markets being near all-time highs. Strong corporate profits may be the “critical driver,” but it is unlikely that they will. 

Little stated that “our research points to an extended regime of low-forlong interest rates”, a negative premium for global bonds and credits, as well as a thin risk premium in credit, and a neutral-looking premium in international equity.

This means that we must be realistic about the fact that investment returns in the coming 24 months will not match those of the previous 12. We find it difficult to believe stocks have reached bubble valuations. 

A risk premium is an amount that an asset provides in return for a higher rate than the risk-free rate. 

Perspective on inflation 

Although HSBC is not a big believer in the idea that transitory inflation becomes “sticky” due to the fact that supply chains don’t work or labor supply does not return, it acknowledges that there are risks. 

New data on Friday showed euro zone inflation expectationsAt 8.5 years, the highest level in a decade. However, Bank of England chief economist warns that inflation may reach 5%. Inflation has also continuedSome analysts believe it has been more widespread than expected in recent months as the economy has become hotter stateside.

Little stated that “sticky price” would indicate central banks are wrong about inflation and require a tighter policy. Investors might look into inflation hedges that are reasonably priced as an alternative to bonds. Copper and carbon are interesting commodities. Real cash flow assets include defensive equities, quality and switching global credit exposures to infrastructure debt.

He suggested that the macro trends — such as signs of a continued albeit slowing economic expansion, slightly higher medium-term inflation and high valuations across the broader market — should support cyclical and value stocks. Cyclical stocks’ performance tends to be in line with the overall economy. Investors often consider value stocks to be cheap in relation to their financial fundamentals.