HSBC Asset Management stated that the unrelenting monetary and credit settings have led to a "time of difficulty" for global economics, possibly resulting in a damaging surprise for economies in the forthcoming year that markets "may not have fully anticipated." They suggested that global markets are transitioning towards a "brand-new standard," where interest rates are staying around 3% and bond yields around 4%, pushed by 3 key aspects.
Markets have adopted a "new paradigm" as the world order fragments, while a higher likelihood of a recession means that "bonds are back," according to HSBC Asset Management. In its 2024 investment outlook seen by CNBC, the British lender's asset management division said that tight monetary and credit conditions have created a "problem of interest" for global economies, raising the risk of a growth shock next year that markets "may not be fully prepared for."HSBC Asset Management predicts that U.S. inflation will reach the Federal Reserve's 2% target in late 2024 or in early 2025, with the headline consumer price index figures of other major economies also likely to dip to central banks' targets over the course of next year.The bank's analysts are expecting the Fed to start cutting rates in the second quarter of 2024 and to trim by more than the 100 basis points deemed by markets over the remainder of the year. They anticipate that the European Central Bank will follow the Fed, and that the Bank of England will initiate a slashing cycle, albeit lagging behind the other two central banks.Joseph Little, the Global Chief Strategist at HSBC Asset Management, said in the report that "headwinds are beginning to build", and voiced the opinion that further de-inflation may result in higher levels of unemployment, along with tighter credit conditions, a weakened labour market and a depletion of consumer savings, all of which could signal a recession in 2024.Little hypothesised that the prompt action taken by central banks over the last two years is ushering markets towards a "new paradigm" featuring interest rates at around 3% and bond yields close to 4%, driven by three key elements: a "multi-polar world" and an increasingly fractured global order, leading to the "end of hyper-globalisation"; a more dynamic fiscal policy triggered by shifting political priorities in the "age of populism", environmental concerns and high levels of inequality; and economic policy geared towards climate change and the move towards net-zero carbon emissions.
Against the current backdrop, we anticipate greater supply-side volatility, structurally higher inflation, and higher-for-longer interest rates, according to Little. Additionally, economic contractions are anticipated to be more frequent due to the higher inflation rates limiting central banks' capacity to stimulate economies. In the ensuing 12 to 18 months, HSBC AM expects investors to be more vigilant in examining corporate profits, debating the “neutral” rate of interest, and closely monitoring labor market and productivity trends. Markets are now largely pricing in a “soft landing” situation in which main central banks bring back inflation to the target levels without pushing their economies into a recession. Despite this, HSBC AM believes the growing risk of a recession is being overlooked and has made preparations for defensive growth, coupled with the perception that “bonds are back.” In the face of a weaker global economy and slowing inflation, HSBC AM sees selective opportunities in parts of the global fixed income, including U.S. Treasury curve, core European bond markets, investment grade credits, and securitised credits. The organisation is, however, cautious on U.S. stocks due to the elevated earnings growth expectations for 2024 as well as the market multiple being stretched in comparison to government bond markets. As for European stocks, the report analysis indicates those are relatively cheap on a global level, which may restrict the downside unless a recession emerges. Lastly, Little said Japanese stocks may prove to be outperformers among developed markets due to attractive valuations, the end of unconventional monetary policy, and the pressure economy in Japan.
Little commented that idiosyncratic trends in emerging markets call for a selective approach based on corporate fundamentals, earnings visibility and risk-adjusted rewards. He stated that if the Federal Reserve reduces rates extensively in the second half of 2024, as the market anticipates, bonds from India and Mexico and A-share stocks in China will be some of the top chosen emerging market investments. Furthermore, India's recuperation following the pandemic as well as its burgeoning markets and Japan's gradual withdrawal from unconventional monetary policy make them attractive sources of diversification. Meanwhile, the Chinese economy is predicted to grow approximately 5% in 2021 and 4.5% in 2024, however, it may gain from supplementary fiscal policy support. Little remarked that Asian equities are in an advantageous position with regards to growth and, given the global context, they are predicted to stay as a relative strong point. According to him, regional valuations are quite tempting, foreign investors have maintained a light stance while stabilising earnings will likely be the main catalyst of returns in the coming year. In addition, Asian credit may have a much better year as international rates reach their peak, most regional economies do well and Beijing provides a fiscal lift.
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