LONDON — Investors should brace for a “pay-back period” in 2022 following a year of strong gains, as macroeconomic risks mount, according to HSBCAsset Management.

The bank stated that the record-breaking returns experienced by investors over the past 18 months are largely due to “borrowing from the future” in its 2022 investment outlook.

Joseph Little, HSBC Asset Management Global Chief Strategyt noted that both bond yields, spreads, and risk premia all are in decline. A risk premium is an amount of return offered by assets that exceeds the risk-free return. 

He also said that asset class returns have fallen in recent years.

Higher valuations and smaller margins of safety on markets can make a complex macro outlook worse. Little suggested that we should anticipate cross-asset volatility rising.”

HSBC anticipates a high single-digit increase in profit as the economy slows due to supply and demand imbalances, and a gradual normalization monetary policy. It expects global GDP growth to fall to between 4-5% and 4%, with China and Britain at the top and the U.S. and Europe closer together.

There are big dangers

Little stated that the two main risks to demand are Covid-19’s resurgence or China’s “hard landing”, where regulatory and credit tightening continue their grip on economic activity.

His comments were echoed by a spokesperson for the Strategy of Common Prosperity, who said, “We anticipate a variety of targeted easing actions to be implemented. However the strategy of shared prosperity means that investors must accept the fact that the underlying growth rate in China is around 5% right now.”

Little noted that on the supply-side, there is a risk that supply chains will take longer to rebuild than currencies expected and that global labor market distortions continue. There is evidence that post-Covid scarring has occurred, which means that ‘equilibrium unemployment is’ higher than many economists believe.

This could have grave social consequences and indicate that central banks may be wrong about inflation. He said that policy would need to be adjusted more hawkishly to leave investors with few places to hide on the markets.

HSBC said that despite the market and economic uncertainty, the wide growth/inflation mixture remains favorable after 2021’s “warp economy.”

Little stated that the “underlying regime” looks a lot like the 1990s with continued recovery, increased capital expenditure, and policy experimentation.

If that happens, Q4 2022 will see inflation running at 2 to 2.5%. We expect inflation to range between 2% and 3% in 2023-25.

Barbell strategy

HSBC sees a solid case for global equities. Stocks generally outperform bonds in times when labor markets improve, which is currently the case as countries recover from pandemic-era job soarings.

Little explained that financial conditions are still favorable, the equity premium remains reasonable, profit growth is continuing, and this should make stocks outperform bonds.

He added that a rise in bond yields should favor late-cycle and value stocks — those thought to be trading at a discount relative to their fundamentals — many of which are found in Europe and Asia.

HSBC chose to be cautious in its approach because of the complexity of macroeconomic issues. To hedge against uncertain times, a barbell strategy involves being overweight on two separate stocks.

For HSBC, this includes defensive stocks — which provide consistent dividends and earnings regardless of the wider trajectory of the market — such as quality companies and those tied to the ESG transition and digital economy, along with cyclical names.