This news service recently chatted to the global chief market strategist of the private bank about how it is positioning against a background of current events.

HSBC Private Banking is urging clients not to get out of the market but to stay on board during the volatile weeks and months ahead.

“You need to stay invested,” Willem Sels, global chief market strategist, told this news service in a recent call. It is not possible to really time markets in the current environment, or indeed more generally, he continued. 

The private bank is overweight of equities, overweight of emerging market hard currency bonds and underweight cash. Within equities, the preference is for high-quality firms with strong balance sheets, competitive advantages and earnings. HSBC is overweight US and China, and neutral on Europe.

“We are building portfolios to weather short-term volatility. We also have a holding of gold to diversify and hedge against tail risks,” Sels said.

The manufacturing sector at the moment is “doing relatively well”; there appear to be signs of governments doing or potentially working to keep some larger firms in business during the pandemic, Sels continued.

If there are more signs of consumer confidence then “we will get more into cyclical positions.”

Wealth managers have had to contend with the sharp gyrations in markets and the underlying real economy this year as the pandemic struck. Yesterday (28 October), US gross domestic product data showed that the world’s largest economy rose by 7.4 per cent during the third quarter of 2020 - the fastest rate of growth on record after the historic 9.0 per cent quarter-on-quarter contraction in the second quarter. The latest figures take economic output within 3.5 per cent of where it was before the crisis. COVID-19 and the outcome of the US elections continue to weigh on investor sentiment, however, as shown by figures issued this week by State Street. 

Diversity, tech
Asked about other matters, such as the high valuations of technology stocks, particularly big players such as Amazon, Google and Facebook, Sels said it is “very difficult not to hold them.” However, HSBC has been switching into different technology areas to spread risks. 

“We have been diversifying that [tech] exposure in these larger tech names, and moving into Asian and European exposures,” Sels said. 

Sels agreed with the idea that Europe, and possibly other parts of the West, are going into a Japan-style period of lower growth and very low interest rates.

“Expected returns are lower, going forward, compared with what we had in the past,” Sels said. 

Positive surprises?
Asked whether there are positive surprises that investors ought to be aware of, Sels suggested that there is potential for a substantial bounce in consumer confidence. For example, if consumer confidence rises sharply in China, this will boost spending in areas such as tourism (subject to any restrictions).

“It is very easy to be negative when you look at a lot of current affairs too much,” he said, and argued that this explains why the strong market performance since mid-March is a surprise to some people - markets are forward looking, so recent depressing news should not durably affect prices if the future outlook is constructive.

At the moment, consumer demand is not showing enough pressure for there to be much inflation risk to hedge against, even with the volume of QE from central banks.