HSBC Asset Management has told investors to prepare for the “mission economy” and an important shift in the macro regime. Gross domestic product has recovered from the Covid plunge in the U.S., China, and across industrial Asia and corporate profits are experiencing a V-shaped rebound, with 2022 earnings expectations now ahead of pre-Covid forecasts.
“After a period when rising investor optimism lowered perceptions of risk and re-rated risky asset classes, the outlook is now the reverse,” Joseph Little, global chief strategist at HSBC, said. “Increasingly, valuations are set to become a drag on returns as a lot of good news about the recovery has already been factored into prices.”
“We favor cyclical markets like the UK, Europe, and deep value EMs, while remaining nimble in allocations,” Little said. “The downside cyclical risk is the U.S. dollar, which is particularly important for our strategy favoring international equities and EM fixed income.”
Little characterized this as both cyclical, with “a greater use of automatic stabilizers and furlough programs in recession,” and structurally, with green and socially inclusive medium-term growth now being prioritized.
“The old risks of the 2010s are replaced with 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 the U.S. and Chinese policy agendas,” Little said.
“The most fundamental rethink for portfolios should focus on the role government bonds play. As the balance of economic risks shifts, bonds are destined to lose their claim to being cheap hedges.”
“Investors should look to get as close to real, inflation-protected cash-flows as possible. Infrastructure debt is a strong candidate for that and has delivered decent historic returns, offers a higher spread today than global credit, and has a more benign loss profile,” he said.