HSBC's asset manager recently expressed pessimism, signaling recession warnings "blazing red" for quite a few economies, while monetary and fiscal policies seem to be at odds with stock and bond markets. Moreover, with India being the "main macro growth story" in 2023 due to consumer spending and services bouncing back from the impacts of Covid-19, China is noted to be another such economy.
According to HSBC Asset Management, recession warnings are "flashing red" and the fourth quarter will mark a downturn for the U.S. economy, followed by a "year of contraction and a European recession in 2024". Joseph Little, the firm's global chief strategist, said that although some aspects of the economy have resisted so far, the balance of risks suggest an elevated risk of a recession now, with Europe coming in behind the U.S. but with the same macro trajectory. The midyear outlook also pointed to a mild profit recession and an increase in corporate defaults. Little said the silver lining is that high inflation is anticipated to decrease rather quickly, which will give policymakers the opportunity to reduce interest rates. Both the Federal Reserve and the Bank of England are expected to reduce interest rates before the end of 2023, with the European Central Bank following suit in the following year.
At its June meeting, the Federal Reserve (Fed) held their fed funds rate target range steady at 5-5.25%, but indicated two further increases in the rate are anticipated this year. According to CME Group's FedWatch data, the market slightly anticipates the fed funds rate to be a quarter point higher at the end of December. Taking into account that inflation in several major economies remains above their respective targets, the possibility of a rate cut isn't available, hence, it is essential that the economic downturn not occur prematurely and lead to deflation. Little from HSBC pointed out that the upcoming recession will resemble the early 1990s, forecasting a 1-2% drop in GDP, which he believes will create a turbulent time for markets for two reasons: the abrupt financial tightening that's causing a decrease in credit availability, and the fact that the markets aren't reflecting a deeply pessimistic approach.
Analysts at HSBC believe that news over the following half-year could be difficult to process for the market, since it is anticipating a "soft landing" for the recession. They added that the downturn may not be enough to completely remove inflationary pressures, which could lead to increased interest rates over time. Taking this into consideration, the firm believes that investing in the Treasury curve, as well as some European bonds of higher quality, could be suitable. Regarding stocks, caution is advised.
Turning to China, the bank is of the opinion that the effects of the pandemic are gradually wearing off, with domestic household savings and job-creating government fiscal efforts set to sustain demand. Low inflation also gives room for further monetary policy easing and solid GDP growth. Consequently, HSBC is overweight on Chinese equities, considering their diversification potential.
Little noted that value stocks are outperforming growth in countries such as China and Asia, in contrast to developed stock markets. He further identified India as "the main macro growth story in 2023," as a result of rising consumer spending, a solid services arm, and incentives from the government. According to Little, these components are making for a positive economic environment in the country, and the long-term investment prospects for India are still strong.
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