HSBC Smiles On Quality Bonds In 2024

Amanda Cheesley Deputy Editor 29 November 2023

HSBC Smiles On Quality Bonds In 2024

HSBC Global Private Banking has just published its investment outlook for the first three months of 2024.

Despite the complex global investment environment, there are compelling investment opportunities around the world, according to HSBC Global Private Banking's outlook for the first quarter of 2024.

HSBC expects global economic growth to be below normal, but the US engine will continue to run, thanks to a strong US consumer, government stimulus supporting investment and innovation in tech and healthcare.

Chinese economic growth is being held back by difficulties in the property sector, HSBC continued, but more monetary stimulus and deficit spending should help growth. With Europe flirting with recession, HSBC maintains its preference for US stocks and its strong view on the dollar. Overall, HSBC thinks that those calling for a global recession will again be proven wrong.

It also said that rising interest rates were the number one challenge for bond and stock markets in 2023, as central banks have kept hiking for longer than expected. “But as inflation is down markedly, the major western central banks have now paused. This should help ease rate volatility and support asset valuations,” Willem Sels, global chief investment officer at HSBC Global Private Banking, said.

HSBC sees value in quality bonds, following the repricing, and equity valuations have come down too, providing upside for stocks that can deliver on earnings expectations. As policy rates stay high for longer, financing conditions may tighten further, but the private bank does not expect a credit crunch. Credit spreads may widen though, and the firm manages this by focusing on quality – i.e. bonds and stocks of companies with manageable leverage and strong cash flows – preferably large caps. And, as the relative value has shifted from the credit to the rate side, HSBC’s asset allocation also rebalances towards lower risk bonds (sovereigns and investment grade) from higher risk bonds (high yield and emerging markets).

HSBC thinks it is important to extend bond duration ahead of policy easing. Bond investors will gather confidence from the fact that central banks paused at their most recent meetings. HSBC lengthens duration ahead of the Fed rate cuts, which the firm expects to see from the third quarter of 2024. These cuts will weigh on cash returns but should benefit bonds. HSBC is overweight in developed market government bonds, with seven to 10 year maturities, and prefers investment grade corporates over high yield.

The firm also thinks that it is important to broaden US equity exposure to benefit from a soft landing. The US economy should continue to outperform the bearish consensus. High tech valuations are warranted by strong structural growth in areas such as generative AI and robots and new energy transportation. But the resilient economy should support other – cheaper – sectors too, reflected in HSBC’s North American re-industrialisation and healthcare innovation themes. The US consumers’ resilience should benefit its American resilience theme and strategies with exposure to broad US indices.

Markets will also continue to worry about cyclical, interest rate and geopolitical risks. A core allocation to private markets and multi-asset strategies can add diversification, while nimble hedge funds can take advantage of market volatility, the firm continued. Volatility strategies can help take a directional view on volatility or can be used to generate income to stabilise portfolios’ total returns.

Slow Chinese growth, high rates and a strong dollar should impact emerging market countries to different degrees, the firm said. So it looks for markets with positive cyclical momentum and structural growth stories, with India standing out on both counts. ASEAN and Mexico are well placed to ride on the supply chain diversification trend and the growth of middle-class consumers, the firm added. Given the very low valuations, HSBC also sees select opportunities in Hong Kong and mainland China growth leaders in the service consumption, internet, and electric vehicle sectors. Its Asia high conviction themes tap into all these topics. After a big repricing that has been seen in the past 24 months, it’s important to rebalance portfolios, the firm said. Amid low growth and a policy rate plateau, putting cash to work in quality assets tends to be the right approach. HSBC’s strategy for 2024 is to find diverse sources of return and income, to boost the return potential and manage volatility.

HSBC focuses on quality, resilience and diversification throughout, preferring Treasuries and investment grade over high yield; and choosing US, emerging market Asia and Latin American stocks over Europe; as well as adding hedge funds and tail risk hedges.

The firm is consequently underweight in cash and overweight in fixed Income, with an overweight in developed market (DM) government bonds, and a preference for investment grade over high yield. For equities, it is neutral, with an overweight in US, emerging markets Asia and Latin America stocks. It is underweight in the eurozone and it is overweight in alternatives, with an overweight in hedge funds, and keeping core allocations in private markets and real estate.

Key trends
HSBC has identified five key trends to help high and ultra-high net worth individuals navigate the complexity.

The global private bank finds compelling growth opportunities in supply chain reorientation, rising wealth and middle-class consumers, digital transformation and the green transition in Asia.

Another trend is disruptive technologies, including generative artificial intelligence (AI) and robots, alternative fuels and the aerospace sector. HSBC also singles out climate action, saying that it has significant momentum due to new technology, global investment and the desire for sustainable solutions. 

As society evolves, themes may change from time to time but the focus is currently urbanisation, healthcare and social empowerment, HSBC added.

The private bank also sees opportunities in the resilient US economy, US onshoring, quality credit markets and senior bank bonds.

“As we look into 2024, the investment environment remains complex. But amid the uncertainty, we go back to fundamentals. The rate hikes of 2022 and 2023 have created more attractive valuations, and the rate headwind should turn into a tailwind. We focus on quality, diversification and management of tail risks, but see plenty of opportunities in our five trends to put cash to work,” Sels said when concluding.

Cheuk Wan Fan, chief investment officer for Asia at HSBC Global Private Banking, added: “Going against the global headwinds, Asia’s robust private wealth accumulation, resilient middle-class consumers, digital transformation and green transition offer solid domestic drivers to support healthy economic growth.” 

HSBC is not alone in its views. UBS Global Wealth Management also sees high-quality bonds as an attrative investment opportunity in 2024, notably investment grade. See more here.

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