As and when vaccine rollouts give governments the confidence to start easing restrictions, there could be an upswing in consumer spending and economic activity, and possible spikes to inflation. We talk to HSBC Private Banking about how it is positioned for this and other eventualities.

Inflation could become more volatile in the coming months as economies fire up around the time that vaccines, hopefully, covering a sufficiently large number of people for governments to ease anti-virus controls, the chief market strategist for HSBC Private Banking says.

Even so, Willem Sels told this news service in a recent call that he does not predict a big rise in inflation.

Like a number of other private bank strategists, Sels is positioning client portfolios with a view to when the various COVID-19 vaccines are rolled out to enough people so that governments can start lifting the heaviest controls, enabling economies to revive. Central banks are monitoring the situation – the speed and scale of any economic rebound will dictate when and how the taps of quantitative easing can be turned off.

Sels’ view about inflation seems to be in the mainstream. Natixis, the investment management firm, argued late last week that although inflation in the US could reach or go above 2 per cent, this will be temporary (core consumer price inflation is 1.6 per cent present). 

Inflation seems some temporary upside, as US fiscal spending rises and the economy accelerates, markets may worry that central banks will start to taper their bond purchases. But central banks will avoid any “taper tantrum” by keeping policy rates low and giving very clear guidance that there is no urge to taper, Sels said. 

Sels remains “constructive” on equities and some investment-grade and high-yield debt. “The view is that markets will look through the COVID issues and we will continue to have very low interest rates ... This is going to be a year of more volatility,” he said. Investors must consider that the effect of the virus and the lockdowns/other measures to control it, will squeeze companies’ cash-flows, putting some firms under pressure.

HSBC does not expect a sharp rise in inflation, although price levels may be more volatile given that forces - such as a sudden shift in consumer spending as and when vaccine coverage reaches a critical level - may come into play, he said. 

Value and growth
There were some predictions that value stocks, as opposed to growth stocks, would come back into fashion, which has happened, but perhaps not to the extent that had been expected, Sels said.

The outperformance of value vs growth since October makes up for less than one third of its underperformance earlier in the year. And that followed almost uninterrupted outperformance of growth stocks since 2007, Sels continued. “There’s nothing wrong with growth stocks and the rates outlook is supportive for them.”

The bank is planning to expand holdings in tech in a move away from some of the bigger US names into a wider mix, including European securities.

Asian credit is an interesting area because of yield spreads, which are attractively wide.

Sels sees opportunities in private market investing. There is sufficient new supply of private investment areas to cope with demand for it, he said, responding to questions about how trillions of dollars of “dry powder” can be absorbed.

“If you are not in it [private markets] there’s an opportunity set you are missing,” Sels added.