'Back to Normal' environment for global economy in 2019 - HSBC Global Asset Management

| 18 Dec 2018

HSBC Global Asset Management believes that the global economy will go back to more normal rates of growth, close to a long-term average pace of 3.2%. Good investment opportunities will be found in Asian equities and emerging market (EM) equities, as well as short duration bonds.

“It will be ‘back to reality’ in 2019. Global economic growth has slowed, and monetary policy is likely moving towards neutral, but we think the global economy is in pretty good shape – and that worries about a major growth slowdown or recession are over-done, especially when we look at the continued positive trends in corporate profitability,” says Bill Maldonado, Chief Investment Officer, Asia Pacific at HSBC Global Asset Management.

“The global economy is moving from cyclical divergence in 2018 to running on two engines of growth – China and the US. The economic performance of these two countries will be really important for determining the path of the global economy.”

2018 has been a challenging year for investors, with concerns around Federal Reserve rate hikes, a strong dollar, geopolitical uncertainties, and an economic slowdown dominating investor sentiment and creating waves of volatility in financial markets. This, however, has created opportunities for investors in 2019.

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“We remain pro-risk and prefer to back growth through equities rather than credit. A number of growth-sensitive asset classes have become significantly cheaper over 2018, and we think they now offer good value – especially Asian equities and emerging market equities. In multi-asset portfolios, we also think there is value in some US Treasuries, especially compared to European government bonds,” Maldonado adds.

Value emerges in Asia, especially China

HSBC AMG expects a number of interesting opportunities in equities markets, especially in Asia and some emerging markets, which look a lot cheaper after an indiscriminate sell-off in 2018. Economies have stayed resilient in an increasingly challenging environment.

Although investors’ geopolitical and macroeconomic concerns seem to have won over fundamentals in 2018, HSBC AMG thinks the situation could reverse in 2019. Fundamentals have strengthened because equities are now more profitable, also some of the negative macroeconomic factors which have taken up so much of investors’ attention seem likely to be less of a focus going into 2019.

Among Asian equities, HSBC AMG especially likes China as the Chinese economy has held up well despite concerns around growth and trade tensions. As these concerns fade, it could support Chinese stocks next year.

“We believe current valuations are undemanding after the sharp correction this year,” says Mandy Chan, Investment Director, Head of China and Hong Kong Equities, HSBC Global Asset Management.

“In addition, Beijing has stepped up its fiscal support as well as its liquidity support across the financial system, since the middle of the year as policymakers have focused on calming market jitters and sought to soothe battered markets, reversing the earlier emphasis on reining in credit growth. From our perspective, policymakers appear to remain committed to arresting a slowing economy, with the market expecting more fiscal and monetary policies to revive growth.”

Signs of improvement in Asian bond market

Bond markets have posted negative returns this year – with a few exceptions – in contrast to their performance in 2017. HSBC AMG believes the global environment in 2019 could be more positive for bonds, especially because there are signs of improvement in the factors that have been impacting Asian bond markets.

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Gregory Suen, Investment Director, Asian Fixed Income, HSBC Global Asset Management says, “Uncertainties in Asian emerging market countries have been a negative factor against Asian bonds in 2018, but we believe that conditions have stabilised. This includes India and Indonesia – their currencies have recouped some of their earlier losses. The recent oil price decline is also positive for these economies.”

“The looser liquidity and monetary conditions in China as a result of some progress being made in the onshore deleveraging process will be constructive for both Asian USD bonds and RMB bonds. We are constructive on RMB bonds in general as China’s economic conditions and soft inflation are supportive of the bond market. The default rate is still significantly lower than global averages and default concerns are probably overblown. At the same time, the inclusion of onshore Chinese bonds in global bond indices in 2019 should continue to attract foreign participation,” Suen adds.

Macro and political issues will likely have a significant impact on market action going forward. Given the macro backdrop today, HSBC AMG believes it is important to be diversified, to be willing to ride out phases of volatility, and to be adaptive to any changes in the environment.

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