Mid-Year Outlook 2020 - The trend accelerator - HSBC Malaysia
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Mid-Year Outlook 2020 The trend accelerator June 2020
Executive Summary
The trend accelerator
COVID-19 containment measures meant the global economy experienced a “sudden-stop”; it was as if the electricity to the system had
been turned-off
Following the fastest bear market of all time came the fastest recovery. This rapid reversal has been labelled as “irrational”, but this view is
incorrect – the recovery since mid-March has been due to:
Markets being forward-looking. For example, a decline in new virus cases has created a perception that the pandemic is under control
A reduction in extreme downside risks following bold policy support
Asia as an indicator: we have seen a “back to work” dynamic in China and industrialised Asia;
Market drivers: gains in tech and healthcare vs. weakness in retail, hospitality, and tourism which do not have significant market weights
1How did we get here?
The crisis, the economic sudden stop, and market behaviour
2An economic sudden stop
The pandemic and “great lockdown” created one of the largest macro shocks in history
HSBC Global Asset Management Global Growth Nowcast (real-time GDP measure)
%
10
5
0
-5
Expected to
fall further in
the coming
-10
months
-15
-20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: HSBC Global Asset Management, May 2020
3A colossal selloff in risky assets in February and early March
Market performance in 2020 so far
USD Total Returns
USD Total Returns
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
Government Bonds Corporate EM Equity Other Asset Classes
-45% Bonds Debt
US Treasuries Global Bonds Global ILBs (H) Global IG Global HY USD EM Debt Local EM Debt US Equities Global Equities EM Equities WTI Oil Gold US Dollar
(H) Credit (H) Credit (H)
Pre global pandemic (End 2019-19th Feb 2020) From 19th Feb-latest
Source: Bloomberg, HSBC Global Asset Management, May 2020
4What comes next?
Core themes for the rest of the year and beyond
5Our outlook for the second half of 2020
Looking ahead, our baseline global growth scenario is for a “swoosh recovery” where growth rebounds strongly before moderating to
eventually restore the bulk of lost output
In practice, however, there are downside risks. The risk of a second-wave of the virus looms large, the potential for fiscal policy “under
delivery” is high, plus there is a likelihood of long-term economic damage to trade flows or labour markets
Different economies have different capacities to absorb the shocks, and regional dynamics could look quite different. This is exacerbated
by the retreat of the post-1990 era of “hyper-globalisation” and the further rise of economic populism
Meanwhile, government bonds offer very low future returns even as fiscal policy support is becoming more important. This means we need
to think harder about how to achieve diversification, and alternatives must play a bigger role
Finally, environmental and social issues are likely to move to the top of the agenda in a society more focussed with sustainability. This
elevates the importance of sustainable investment considerations
Overall, these developments create selective opportunities for investors with a greater emphasis on regional allocation, styles and
sectors
6Global growth scenarios
Possible realities for the macro-economy
Our baseline is for a “swoosh recovery” where growth rebounds strongly before moderating to eventually restore the bulk of lost output
Assumptions
COVID-19 Containment measures Support policies Result
GDP Index
Vaccine rolled out at the
Stagnation
start of 2022 Partially lifted during 2020
Cannot prevent financial stress or a significant fall
in the level of the economy’s productive capacity Lower trend growth and
Slow progress in testing Completely removed from Q4
and long-run growth rate lower trend output
2021
Second wave of infections in
Q2 2021
Q1 19 Q1 20 Q1 21 Q1 22
Vaccine rolled out in mid-
Sudden stop & set
GDP Index
back (Swoosh
2021
recovery)
Partially lifted during 2020
Cannot prevent a persistent loss of the economy’s
Significantly increased rate
productive capacity, but pre-virus long-run growth
of testing Completely removed from mid-
rate is broadly maintained Return to pre-virus growth
2021 rate, but lower trend output
Further outbreaks are
isolated and contained
Q1 19 Q1 20 Q1 21 Q1 22
Quick recovery
GDP Index
Vaccine rolled out at the
Lifted gradually over 2020
start of 2021 Cannot prevent some persistent loss of the
economy’s productive capacity, but pre-virus long-
Completely removed from the
Widespread testing run growth rate is fully maintained
start of 2021 Return to pre-virus growth
rate and trend output
Minimal further outbreaks
Q1 19 Q1 20 Q1 21 Q1 22
Any views expressed were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Global Asset Management
(UK) Limited accepts no liability for any failure to meet such forecast, projection or target.
Source: HSBC Global Asset Management, May 2020. Note: Dashed red lines in charts indicate the scenarios are consistent with different paths for activity; the scenarios describe the broad trends
7How regional dynamics could play out
We expect China and industrialised Asia to lead the way
The likely outperformance of industrialised Asian economies in the recovery phase supports our overweight view on Asian asset classes
such as Asia ex. Japan equities (including China, South Korea, Taiwan), and Asian corporate bonds
Comment Stagnation Swoosh Rapid recovery
US unemployment is elevated and consumer are saving much more
US
However, the US policy response has been among the most forceful globally
The national level of fiscal response has been significant
Eurozone But coordinated fiscal policy is hamstrung by political constraints, while the ECB is
pushing against the limits of its mandate
The UK's economic policy response to the crisis has been timely and robust
UK But problems with developing adequate test-and-tracing infrastructure increases the risk
of a second wave of infections. A disruptive hard Brexit is also possible
China has seen a notable recovery from supply-side disruptions. Policy support is also
China strengthening, despite lingering financial stability/debt concerns
But the path is uneven and service sectors are lagging
Japan/ Many industrial Asian economies have developed good testing and tracing capacity
developed Policy support has also been strong, although weak external demand is a big risk, and
Asia Japan is increasingly constrained on the policy front
Parts of ASEAN and India have limited fiscal policy space and weak healthcare systems
EM Asia
The region faces external trade and financing risks
Any views expressed were held at the time of preparation and are subject to change without notice.
Source: HSBC Global Asset Management, May 2020
8Asia as an indicator
China is getting “back to work”
China's industrial sector is showing a recovery… …similar dynamics for passenger car sales volume
% China passenger sales, % yoy; 4 week average
15 80
60
10
40
5
20
0 0
-5 -20
-40
-10
-60
-15
-80
-20 -100
Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 2016 2017 2018 2019 2020
IP (YoY) (LHS) High-tech manufacturing IP (YoY) (LHS) Retail Wholesale
Signs that investment has bottomed out Recovery in domestic flights; none in international flights
China fixed asset investment (FAI) by selected sectors (% yoy; ytd) Daily number of flight departures
30 14,000
25
20 12,000
15
10 10,000
5
0 8,000
-5
-10 6,000
-15 4,000
-20
-25 2,000
-30
-35 0
2017 2018 2019 2020 01-Jan 15-Jan 29-Jan 12-Feb 26-Feb 11-Mar 25-Mar 08-Apr 22-Apr 06-May
Total FAI Manufacturing Power and utility
Domestic International
Infrastructure (NBS) Real estate
For illustrative purposes only. Any views expressed were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC
Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast, projection or target.
Source: Bloomberg, WIND, CEIC, HSBC Global Asset Management, May 2020.
9The valuation context
Risky asset valuations look very attractive to us, while DM government bonds seem expensive
HSBC Global Asset Management Implied Risk Premia
Cheapest
Most expensive
Source: HSBC Global Asset Management, May 2020
10Thinking about portfolio diversification
Alternatives can play a greater role in asset allocation decisions
Performance of liquid alternatives during previous large equity market declines
100%
Traditional assets Style Factors Liquid Hedge
Funds
80%
60%
40%
20%
0%
-20%
-40%
-60%
MSCI World Treasuries Quality Momentum Low Volatility HF Multi Strat HF Equity Market HF Macro HF Merger Arb
Neutral
Black Monday Gulf war Asian Crisis Tech bubble Financial Crisis Euro Crisis 1 Euro crisis 2 2018 Q4 COVID-19
Quality = AQR quality - junk, Momentum = GS cross asset trend, Low vol = MSCI min vol – MSCI world, HF Multi Strat = HFRX Global, HF Market Netural = HFRX EMN, HF Mcro = HFRX Macro, HF Merger Arb = HRFX MA
Any views expressed were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Global Asset Management
(UK) Limited accepts no liability for any failure to meet such forecast, projection or target.
Source: HSBC Global Asset Management, Bloomberg, May 2020.
11A retreat of hyper-globalisation
Risks to growth, but some opportunities for companies, countries and regions best able to
adapt
Global trade volumes, what happens next?
150 CPB merchandise: World Trade volume Index
World trade Volumes (SA)
140
130
120
?
110
100
90
80
70
60
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
World trade volumes Trend 1991-2008 Trend 2011-2018
Any views expressed were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Global Asset Management
(UK) Limited accepts no liability for any failure to meet such forecast, projection or target.
Source: Bloomberg, HSBC Global Asset Management, May 2020
12Environmental and social issues on top of public policy agenda
This elevates the importance of sustainable investment considerations
Let’s flatten the carbon curve! A fight against inequality (the elephant curve)
Source: HSBC Global Asset Management, World Bank, UN, Intergovernmental Panel on Climate Change, International Source: HSBC Global Asset Management, World Inequality Report (2018), May 2020.
Institute for Applied Systems Analysis, May 2020.
13Investment themes
14Core investment strategy themes
Multiple equilibria
Economic uncertainty is very high. There are “multiple equilibria” or possible outcomes
Our baseline scenario is for a “swoosh recovery”
But there are risks, and there will be regional differences
Great rebalancing
The diversification properties of government bonds may deteriorate in this environment
We advocate using other parts of fixed income (e.g. high-quality corporate bonds) and alternatives (such as
“quality” stocks)
Structural shifts accelerate
The crisis has accelerated a number of structural trends which were already underway
These changes in globalisation and trade, populism, and environmental and social issues can no longer be ignored
by investors
Any views expressed were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Global Asset Management
(UK) Limited accepts no liability for any failure to meet such forecast, projection or target.
15Strategic views
Change vs
Asset Class View Com m ents
2020 Outlook
The current environment is characterised by high levels of uncertainty and market volatility. But substantial policy easing and reduced spread of
Risk budget 1 q
Covid-19 have reduced extreme dow nside risks. The recent market rally means risks are more balanced in the short-term
Macro factors
A rapid economy recovery could surprise markets, although risks still are tilted to the dow nside. A "sw oosh" type of recovery is the most likely
Global grow th p -
scenario. Expected returns for risky assets have improved. Investors are rew arded for absorb volatility
Interest rate risk Investors are being penalised to bear risks related to unexpected changes in interest rates, although rates are likely to remain ultra-low . Prospective
q -
("duration") returns are very poor and a shift tow ard fiscal support could damage the diversification properties of global bonds
EM asset classes have attractive valuations, but now also other parts of the opportunity set too. Emerging economies have limited capacity to fight
Emerging Markets 1 q
the current health and economic crisis. The bright spot is Asia w here a grow th recovery from China can be a tailw ind
Valuations are attractive versus other government bond markets and they can rally more during risk-off episodes. A “low er forever” rate scenario
US q -
limits dow nside risks. How ever, prospective returns are very low . We prefer shorter-duration Treasuries (up to 5 years)
Prospective returns are poor. There is no clear reason w hy investors should ow n euro bonds vs other govvies. Peripheral bonds can offer good
Europe q -
Bonds
yields but w eak government finances is a key risk
Inflation is expected to be low . How ever, inflation risks are neglected. Market pricing of inflation-linked bonds seem to offer a good entry point despite
Inflation-linked bonds p -
subdued inflation in the coming years. We prefer US TIPS (Treasury Inflation-Protected Securities)
Prospective returns are high, but most of it comes from cheap currencies and bond yields are reaching historical low s. A "sudden stop" of investor
Local currency EM bonds p -
flow s and strong dollar demand coupled w ith economic challenges could limit upside potential
Prospective risk adjusted returns have improved. We are seeing an acceleration in corporate dow ngrades and defaults, but current yields and
Global IG p p
recent policy actions have helped reduce extreme dow nside risks
Even though default rates are set to increase from here w e think this is captured in improved valautions. DM central banks have enacted policies to
Credits
Global HY p p
support the sector. Any spillover from the energy sector to the corporate market is a risk to w atch.
Asia HY p - Asia HY can benefit from Chinese policy support and a grow th pickup. Spreads look attractive
The current environment is tricky for broad EM economies and corporates. Many have limited fiscal and monetary pow er w hile their healthcare
Hard Currency EM bonds 1 p
systems are w eak. Defaults are expected to increase. How ever, the improvement in prospective returns reflects this.
Large policy support and vast economic, medical and technologic resources to fight the outbreak support US firms. Exposure to big tech companies
US p -
have been beneficial
European markets look vulnerable to a w eaker global grow th environment and policy can be more constrained. Rew ards to investors are limited by
Europe 1 q
government pressure to maintain low dividends and earnings w eakness
Equities
Japanese equities also look relatively more vulnerable to a w eaker global grow th environment and policy constraints. This challenges the ability for
Japan 1 q
investors to "unlock" attractive valuations
Asia can benefit from an eventual grow th recovery from China and further policy actions. Valuations have improved. How ever, the region is not
Asia (ex Japan) p -
inmmune to a gloal recession or increased US-China political tensions
Valuations have improved but are not outsized. A global recession, low er commodity prices, investor outflow s and w eak health systems make many
EM ex Asia q q
EM economies vulnerable. Being selective is key
The outlook for the dollar is more neutral. On the one hand, reduced perceived safe-haven demand and the prospect of other central banks cutting
US dollar 1 -
Other
policy rates could w eigh on performance. On the other hand, the dollar can gain during phases of elevated uncertainty
A global shutdow n and a slow demand recovery are a big demand shock for commodities. Valuations have improved, but not enough to make us
Commodities q q
think they are very attractive
Any views expressed were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way.
HSBC Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast, projection or target.
Source: HSBC Global Asset Management, May 2020
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