Global equities struggled in 2022 owing to issues like COVID, the impact of the Russia-Ukraine war, high inflation, global tightening of monetary policy, tighter corporate margins, among others.
In a recent note, global brokerage house HSBC said that the global economic slowdown will remain a key headwind for stocks for some time and hence, it is mildly ‘underweight’ on global equities.
As per the brokerage, the recent repricing of equities has made the valuations now look attractive, but until earnings growth is downgraded sufficiently to reflect the new reality, the risk premium is unlikely to compress much, and volatility should remain in place.
Meanwhile, it is ‘overweight’ on high-rated bonds as they can provide diversification, and says bond yields already price in a lot of tightening.
"Rising rates hurt both equities and bonds in 2022, but with many rate hikes priced in, and the focus of market focus increasingly turning to the economic cycle, we think bonds and equities will become less correlated, with high-quality bonds becoming a better diversifier than they were in 2022," said the brokerage.
"As the growth cycle lags the rate cycle, we much rather take rate risk than cyclical risk. We are also overweight in hedge funds to diversify and mitigate uncertainties. We look for the silver lining and explore what could eventually make us more bullish. And we continue to highlight structural opportunities at attractive valuations, related to sustainability, technology and in Asia," said HSBC.
The Eurozone and the UK are going through a recession, and although the US is more resilient, growth is below normal there too, it said, adding that it expects one or two negative quarters of US growth in 2023. Meanwhile, China’s growth rate could bottom as supportive monetary policy should start to pay some benefits.
Recent policy measures reduce downside tail risks for housing markets and ease COVID-related bottlenecks, but economic activity is unlikely to accelerate sharply, it added.
While low rates in the past decade were designed to boost growth and avoid deflation, the interplay between rates, growth and inflation now works the other way around. Sticky inflation is bound to keep rates high for longer, which should continue to slow growth, with a lag, it explained.
In addition, it noted that the lag with which all the rate hikes we’ve seen around the world will affect inflation and growth, is highly uncertain, creating the risk of a policy error (too little or too much tightening).
However, the brokerage highlighted that despite a challenging macro backdrop of the global downturn, Asian economies continue to stand out as a relatively safe haven with resilient domestic fundamentals to weather the recession risks.
The brokerage expects GDP growth in Asia ex-Japan to accelerate to 4.5 percent in 2023 from 3.9 percent in 2022, which is still respectable compared with many developed economies which should see close to zero growth in 2023.
It also believes a recovery in China’s consumption and investment amid its gradual reopening would boost the overall growth outlook for the region.
Markets will try to assess when the Fed can be confident that inflation is well on its way down because that will allow it to slow hikes and eventually pause, it said.
“It’s impossible to know for sure, but this milestone could happen in Q1 or early Q2, and would create a more constructive bond environment and allow us to increase duration exposure,” added the brokerage.
For now, it maintains a cautious portfolio composition, but advises investors to continue to watch key milestones as markets will see a rebound sometime in 2023.
Among different global economies, HSBC is overweight on markets in the US, Mexico, Brazil, Switzerland, Mainland China, Indonesia, Thailand and Hong Kong. It prefers sectors like consumer staples and energy (including renewables).
Meanwhile, it is underweight on markets including UK, Germany, Spain, Italy, South Africa, Turkey, South Korea and Taiwan.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.