This week, HSBC Global Private Banking published its global investment outlook for Q4 2022 – from capitulation, to bounce, to consolidation.

A new report by HSBC Global Private Banking for Q4 2022 highlights the firm’s long-term optimism on Asia’s economic growth and stock market potential, and emphasises how the US economy and stock market is more resilient than Europe's.

In spite of the short-term obstacles that currently keep Chinese and emerging market Asia equities at a neutral allocation, the bank said that it sees long-term value and return potential in Asia.

“Our theme of ‘Asian Champions at Great Value’ positions in quality stocks with strong market positions which are currently trading at deep valuation discounts,” global chief investment officer, Willem Sels, said.

“Following the consolidation, we believe any notable rebound in Chinese economic data or a break-out in global risk appetite should help unlock that long-term value for years to come,” he added.

Globally, Sels explained how stocks and bonds fell sharply in the first half of 2022 as markets were spooked by the stagflation scenario and anticipated rapid Fed rate hikes.

“But during the summer months, both bonds and stocks bounced sharply, in the hope that central banks wouldn’t hike as much as previously feared to allow the global economy to achieve a soft landing,” he continued.

Sels said it is still premature to fully price in this positive scenario, saying markets have had to give back part of the gains as there isn’t the all-clear yet. “Some inflation components are proving quite sticky and central banks are not ready to slow rate hikes, let alone pivot toward rate cuts,” he said.

For months, private banks and wealth managers have worked out how to change asset allocations and position for a world of higher inflation, elevated market volatility, and the disruptions caused by the pandemic, Russia's invasion of Ukraine, and the chilling of relations and trade between the US and China. A few days ago, for example, Credit Suisse announced it was going underweight of equities. Pictet, another Swiss bank, has said it is cautious about risk exposures in the current environment.

Downtrend
“Whilst there is relative economic resilience in the US, the heightened recession risks in Europe and the likely delay in China’s economic rebound mean global data are still on a downtrend,” he warned.

Instead of a V-shaped market bounce, Sels believes that a period of consolidation would be more appropriate first. “A sustained rally should follow thereafter, when some of the fundamental headwinds have eased and there is more clarity on policy and geopolitics,” he said.

“So we may be stuck in a wide and volatile trading range for now,” he said. “When markets fall toward the bottom of that range, opportunistic buyers will continue to step in, because the June lows priced in quite a negative scenario,” he added. “But toward the top of the range, the mixed economic data we foresee, and the potential for surprises from central banks, should remind investors not to anticipate too much,” Sels said.

US economy
Sels said he thinks the US economy and stock market are much more resilient than Europe, where energy supply interruptions risk triggering a recession. He doesn’t believe that the diverging outlook is sufficiently priced in, and the firm has therefore increased its preference for US over eurozone stocks.

The dollar should be well supported against the euro. The US currency tends to do well when markets flip between "risk on" and "risk off" episodes, as Sels expects.

Style wise, he prefers quality stocks, as differentiation should continue to benefit the winners.

Finally, Sels thinks that markets won’t drift much while inflation remains elevated, implying that income generation will be a key component of total returns. He consequently looks for dividend stocks.

Sels described how investors can benefit from volatility. “Selling volatility when it spikes can generate income. Using market weakness to accumulate positions of the favorite stocks on your bucket list also makes sense, while excessive rallies can be used to clean up the portfolio and eliminate positions with weaker fundamentals,” Sels said. Rate volatility should remain substantial, and provide opportunities to add to FRNs (when market expectations for rate hikes have dropped too far) or fixed rate bonds (when those expectations are toward the high end), he said. 

“Rate volatility will also cause the relative performance of value and growth stocks to move up and down, allowing investors to use that volatility to move to a more balanced exposure,” he said. “Hedge funds are well placed to take all these timing and relative value decisions, and hence they remain a key overweight for us,” Sels said.

“Third and finally, during a consolidation period, investors may want to look at longer-term structural opportunities, especially as some of them have become cheaper after the drop in valuations in H1,” Sels sadded,

The firm has also re-positioned its energy transition theme (which was focused on sustainability) to include countries’ growing objective to have energy independence, as it believes that the two objectives reinforce each other.

The topics of self-sufficiency and deglobalization are also represented in the firm's ‘Total Security’ theme, which includes supply chain, cybersecurity and food security.