Investment Strategies

Fair Weather For Equities, Inflation Not A Big Worry - HSBC Private Banking

Tom Burroughes, Group Editor, London, 20 September 2021

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Economic growth is slowing somewhat, which paradoxically takes some pressure off the Federal Reserve and other central banks to tighten monetary policy quickly, the private bank's CIO said.

The pace of global economic growth is slowing but remains supportive for global equities, such as those benefiting from an upswing in the business cycle, HSBC Private Banking says. The firm is overweight areas such as certain consumer sectors and financials.

“The first leg of the recovery was principally driven by global manufacturing, which continued to operate during the lockdowns. The next leg should see stronger growth in services, with business surveys suggesting a strong pickup in service sentiment,” Willem Sels, global chief investment officer, Private Banking and Wealth Management, HSBC, said.

Along with its peers, the UK/Hong Kong-listed banking group is working to position itself for how and when central banks "taper" their bond purchases - aka quantitative easing - as the global economy (hopefully) returns to normal after the pandemic. 

“Thus, we maintain a cyclical stance overall but increasingly focus on the consumer, with an overweight in consumer cyclicals and select opportunities in consumer staples,” he said in his third-quarter outlook. 

In a call to this publication, Sels added: “Economic growth is slowing…..growth remains at a very respectable rate and that’s good for the markets. It [slowing growth pace] takes a bit of the pressure from the Fed to rapidly tighten monetary policy. It will also enable the supply side to catch up with demand.”

In his investment note, Sels wrote: “Geographically speaking, some of the strongest cyclical momentum is in the US and the UK, two equity markets which we are overweight. Our overweight on China may seem surprising, as data are not accelerating anymore, but we think growth will outperform relative to market expectations. Valuations are attractive as well following the recent volatility. We think market fears of tightening lending conditions are overdone, credit supply is being directed to the private sector, and our Chinese growth forecasts still stand at a very respectable 8.5 per cent for 2021.”  

The infrastructure sector should benefit from government policies, such as those in the US under President Joe Biden, to boost transport, clean energy and other areas, as well as encouraging silicon chip manufacturing, Sels said. 

The digital tech revolution and its impact on business areas has further to run, he said. 

“Rising Treasury yields posed a headwind for growth stocks, but as yields stabilise, the superior earnings growth in the sector should help tech to start outperforming again. The reopening will broaden consumption beyond online retailers (we therefore retired our digital consumer theme) but strong companies will require digital platforms. We have launched a total security theme, as the world requires increased cybersecurity, personal and health security, and safe and healthy food,” Sels said. 

“Asia’s growth also remains structurally higher than in developed markets, and other emerging market blocks. China will remain the main engine of growth in the region. Interesting opportunities lie in high-end manufacturing, automation, electric vehicles, education and healthcare services,” he said.  

This publication asked Sels about inflation risks. Earlier in the summer, punchy UK and US inflation figures revived – for some – memories of the high inflation periods in the 70s and 80s. 

“Inflation should calm down but come down later than previously thought. We need to build portfolios that are more resilient,” he said. “We’ve moved to quality stocks – firms with good margin power, and we have gone for large-caps and taken profits from industrials and materials. We like diversification. We are going for more geographical diversification.”

Is there a risk of inflation expectations becoming entrenched and a problem?

Expectations have gone a bit in the UK and US, Sels said. “It is still a very benign increase and not something the Fed or Bank of England need to crush in the short term. Our view is that core inflation comes down because of structural forces. Global trends are still going against inflation,” he said, citing issues such as offshoring, made even more possible by tech having enabled remote working, etc. 

Some pro-inflation forces exist, however, for example from pushbacks in some countries against “the gig economy,” while the ESG/sustainability agenda will put upward pressures on prices, Sels continued. 

While there has been some pushback against globalisation, the trend is more towards diversifying supply chains rather than against trade as such, he said. 

Digitalisation, AI and certain other tech tends to be good for productivity and goes against inflation, Sels added.

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