HSBC Global Private Banking ("HSBC GPB") expects the improving global economic cycle, broadening earnings growth and central bank rate cuts will bring plenty of opportunities to put cash to work in quality bonds and equities.
For the next six months, HSBC GPB adopts a risk-on investment strategy with zero allocation to cash and overweight on global equities, US Treasuries, and global investment grade bonds. The US market remains its largest overweight within global equities, and it stays overweight on Asian equities. It holds a bullish view on the US dollar due to support of high real yield, divergent pace of central bank easing and safe-haven demand driven by geopolitical uncertainty.
Cheuk Wan Fan, Chief Investment Officer, Asia, Global Private Banking and Wealth, HSBC, says: "We are optimistic about the investment outlook for the second half of the year and continue to focus on putting cash to work in global equities and bonds that we maintain our overweight allocation. We believe we have seen both the peak in bond yields and the bottom of the global economic cycle. This means portfolio performance should be powered by two engines: attractive bond yields and broadening earnings growth."
"The European Central Bank and Bank of Canada have already started their rate cutting cycle. We expect the Federal Reserve will start cutting rates by 25 basis points in September and will deliver three more 25 basis points rate cuts in 2025. The Fed's new dot plot projects the policy rate will drop to 4.125% by the end of 2025. There is little incentive to remain in cash and we advise investors to lock in current attractive bond yields at near decade-high levels," highlights Fan.
"Adding to income opportunities, we look for earnings growth, which is well supported by the broadening global cyclical tailwind and easing cost pressures. US domestic demand is resilient, while the Eurozone and UK economies are bottoming out. We forecast global and US GDP growth to stay solid this year at 2.6% and 2.4%, respectively. China's latest property boosting measures are expected to stabilise GDP growth at 4.9% this year. India's economic activity continues to surprise to the upside on multiple fronts, supporting our forecast 2024 GDP growth of 7.3%. So far, the global equity rally has been led by Big Tech. We have been broadening our geographical and sector exposure in our global equity portfolios to widen the opportunity set and find attractive stocks at reasonable valuations," adds Fan.
Four Investment Priorities for H2 2024
- Broadening our equity exposure across geographies and sectors
"The improvement of economic data should support companies' earnings growth across more geographies and sectors. By broadening the exposure, equity investors capture more opportunities and diversify, while addressing concerns about the rich valuations in the tech sector," notes Fan.
- Putting cash to work in bonds and multi-asset strategies
"Bond yields are currently near decade-high levels, and an allocation to bonds and multi-asset strategies can help generate a stable income stream, while providing portfolio diversification to mitigate against tail risk events," says Fan.
- Tapping into private assets and infrastructure
"Private markets have delivered outperformance versus the public markets in the long term. As more companies are staying private for longer, the depth, diversity, liquidity and ways to access the market continue to grow. Infrastructure investments offer compelling structural growth opportunities on the back of digitalisation, decarbonization and re-onshoring," highlights Fan.
- Unlocking the best opportunities in Asia
"Asia remains the most important growth engine of the global economy with projected 4.7% GDP growth and 23% earnings growth in 2024, well above the global peers. We find promising and diverse opportunities in the region on the back of attractive valuations and strong earnings growth. We hold overweight view on equities in Japan, India, and South Korea, where we see the best opportunities to tap into Asia's structural growth themes. We stay neutral on Hong Kong and mainland China equities with end-2024 target for the Hang Seng Index at 19,230. We expect China's five supportive measures will continue to attract southbound fund inflows into Hong Kong, which should help improve the liquidity conditions of the Hong Kong stock market and bring tactical opportunities for undervalued quality stocks," adds Fan.
James Cheo, Chief Investment Officer for Southeast Asia and India at HSBC Global Private Banking and Wealth, expects China's GDP growth to go sideways in the second half of the year, as it will take longer time for the property sector to digest the massive unsold housing inventory. More supportive policies are needed to stabilise domestic demand by reviving business confidence and consumer sentiment to mitigate deflation risk.
"After the recent rally, we think the Hang Seng Index's valuation remains attractive. We stay selective and prefer undervalued quality stocks in the Chinese service consumption and high-end manufacturing sectors. We favour quality SOEs paying high dividends. We continue to focus on select oversold high-quality Hong Kong developers and REITs with strong balance sheets and a competitive position. We also prefer the Hong Kong insurance, telecom and utility sectors for their growth resilience and the benefit from expected Fed interest rate cuts," adds Cheo.
Thailand outlook
Thailand's economy slowed to 1.5% y/y in Q1 this year. The good news is that domestic spending remains strong. Investment spending in Thailand is also holding up. For the second half of the year, the fillip for the economy could potentially come from fiscal spending, however, there is still a degree of uncertainty over the pace and size of fiscal support. Furthermore, the recovery in tourism arrivals could be bolstered by the high tourism season in July-August and November-December. While growth in Thailand is likely to improve in the second half of 2024, we remain mildly underweight Thailand equities, as we are monitoring the impact of the macro recovery on earnings. Meanwhile, we think there are more compelling opportunities in other Asian markets. "With current macro dynamics situation, the Bank of Thailand is no rush to change its monetary policy setting, possibly keeping rates at 2.5%." says Cheo.
Top Trend of Asia in the New World Order - Q3 2024 High Conviction Themes
HSBC GPB recommends four top investment themes to capture the most attractive growth and income opportunities in Asia.
Asia's Corporate Governance Reform Winners
"We favour corporate governance reform winners in Japan, China and South Korea, which are cash-rich companies with low leverage and financial power to deploy cash to boost shareholders' returns through increasing dividend payments, share buybacks and value-adding corporate actions. Asian governments and regulators are pushing for corporate reforms to boost shareholders' returns and close the valuation gaps of their equity markets relative to the global peers," highlights Cheo.
"Japan provides an example of how improved corporate governance standards can contribute to a re-rating of the equity market. China's State Council recently announced the 'Nine-Point Guideline' which stresses the importance of high dividends and share buybacks. In South Korea, regulators have announced the Corporate Value-Up Programme which aims at improving return on equity and narrowing the 'Korea discount' versus its global peers," notes Cheo.
Reshaping Asia's Supply Chain
"We look for winners of the accelerating supply chain reconfiguration and the friend-shoring trend amid de-globalisation. This has resulted in rapid trade integration in Asia. We favour high-end manufacturing leaders in Japan, South Korea and Taiwan given their pivotal roles in the global semiconductor supply chains. In ASEAN, Singapore, Malaysia and Vietnam are strengthening their leadership positions in the electronics industry," says Cheo.
"Electronics and EV manufacturers from North Asia are ramping up production capacity in ASEAN to expand market shares. ASEAN represents a big new market and a low-cost production base for Chinese companies facing slower growth at home. We favour companies in India and ASEAN that gain from supply chain reorientation under the 'China+1' strategy of multinational and Asian corporations," highlight Cheo.
Rise of India and ASEAN
"This theme captures promising secular growth opportunities from the young demographics, rising middle-class consumers, robust FDI and domestic investment spending, technological innovation and green transformation. India's services export growth has stayed strong with the rapid rise of the Global Capability Centres (GCCs) set up by multinational companies. India now commands over 50% of the global GCC market," says Cheo.
"For income opportunities, we focus on locking in multi-year high yields from Asian IG bonds with 5-7 years duration. With continued disinflation and the Fed's rate cuts likely to start in September, we expect many Asian central banks to start cutting rates in H2 2024. We favour Japanese and Korean financials and IG corporate bonds, Indian local currency bonds, Indonesian quasi-sovereign IGs, Macau gaming and Chinese TMT credits," highlights Cheo.