Indeed, there may continue to be significant opacity around these factors in coming months, and we therefore maintain an underweight allocation in areas which are most exposed. Overall, we prefer developed markets over emerging markets across equity, credit and currency markets. We are also underweight in oil exposure in US high yield, Latin American stocks and the basic materials sector.
“It is important to keep some perspective, though. We continue to believe that in the developed world in particular, the economic recovery will continue in 2016, with broadening growth in Europe and resilient data in the US. Moreover, we believe that global monetary policy will continue to be supportive, with only very slow interest rate hikes in the US and the UK, and continued monetary expansion in the Eurozone and Japan,” said Willem Sels, Chief Market Strategist, HSBC Private Bank. “Fiscal policy may also see some slippage, further adding to policy support and - with the central banks - creating a 'policy put', as suggested by the title of our publication.”
We therefore think that the current correction has created a medium term opportunity for investors in developed markets, as they are starting to reflect an overly negative view on global growth. Emerging markets may have to wait somewhat longer to unlock investor promise, but we think that increased policy clarity in China or any stabilisation in the data in the region will lead us to increase our allocation to EM later this year.
We have identified four multi-asset class themes that will shape much of the market’s discussion and direction.
1. Bond yields lower for longer
Monetary policy is likely to remain easy in Europe and Japan, and the former has indicated it will extend a policy of quantitative easing beyond the original end date, which should ensure bond yields remain low in those regions. Moreover, the Federal Reserve has begun its first tightening cycle in almost a decade against a backdrop of almost non-existent inflation which should drive down US Treasury yields. This provides a platform for opportunities in dividend stocks, longer-dated.
2. From globalisation to localisation
We are intrigued by the changing patterns of globalisation in favour of localisation. Global trade and trade within Asia is slowing, but recent data show there remain pockets of strength in terms of domestic demand around the globe as countries and companies substitute imports with domestic production in a bid to foster growth and employment. From a sector perspective, some areas of manufacturing are experiencing re-onshoring and are being brought back closer to home, while the ‘Internet of Things’ is giving us access to global products and fashions, and the related technology produces many investment opportunities.
3. China in transition
China’s slowdown contributed to damp global trade via a slowdown in manufacturing, but the country’s services sector continues to improve in a dynamic that is typical of an economy moving towards ‘developed status.’ Indeed, Beijing wants to increase the domestic demand component of GDP towards 50 per cent in the years to come to help buffer the economy from exogenous shocks. In the US, for example, private consumption accounts for around two-thirds of the economy.
As China plans and executes a major transition from an investment-led economy to a consumer-led economy, many industries are likely to be affected. A wealthier consumer will travel more, while already improving retail spending should support the Chinese H-shares market, in our view. A focus on sustainability of growth is likely to lead to increased investment in education and green initiatives. We believe the current slowdown in growth can be arrested by fiscal and monetary tools without creating a new credit bubble or causing a currency devaluation. However, this transition of the Chinese economic model may take some time and markets may remain cautious in the short term regarding Chinese stocks.
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4. The end of BRIC
Investment fundamentals vary wildly between BRIC countries and the acronym of Brazil, Russia, India and China has lost relevance as a result due to major differences between these countries in growth and inflation, rising but different levels of debt, varying commitment to reforms and exposure to commodity prices, to name a few issues. At this point, we remain selective, with a preference for Asia, and with a long-term eye on ASEAN’s growth potential alongside its expected population growth and young and relatively ’cheap’ pool of labour.
“Following rapid gains in 2009-2014, we continue to believe that tactical moves in the portfolio, relative positioning, managing currency exposure and diversification all remain critical to achieve the desired performance,” adds Sels.