Look to portfolio resilience in times of volatility
● Add protection to portfolios by focusing on quality, income and diversification
● Disruptive trends of digital transformation and green transformation could drive structural growth and investment opportunities
Protracted military conflict in Ukraine, persistently high inflation and headwinds to growth mean that volatility is at a high and unlikely to cool off any time soon. Amid increased market uncertainty, investors are looking for more resilience in their portfolios.
In its Q3 Investment Outlook, HSBC Global Private Banking maintains its base-case scenario that the economic cycle will continue but Fan Cheuk-wan, Chief investment officer Asia, HSBC Global Private Banking and Wealth highlights several significant headwinds in the coming months.
“The war in Ukraine has resulted in major disruption in the energy and commodity markets and hit investor risk appetite,” says Fan. “From an economic perspective, Russia is not a major export destination for most countries, but what matters most are the disruptions to the supply of oil and gas to the EU and other parts of the world, caused by sanctions against Russia. In addition, both Russia and Ukraine are major producers of a number of commodities, including key metals and agricultural products.
“The recent Omicron outbreaks and the subsequent lockdowns in China have exacerbated the disruptions to global supply chains. Multiple supply shocks have pushed the already elevated inflation higher,” Fan adds.
Supply chain disruptions and inflation
Prolonged high inflation has forced central banks to take a more hawkish stance. The Federal Reserve raised the policy rate by 50 basis points in May and predicted two more 50-basis-point hikes in June and July. The Bank of England raised the base rate by 25 basis points in May and predicted further hikes. The European Central Bank has confirmed it will conclude its net asset purchases in Q3. In contrast, Asian central banks generally do not need to raise interest rates as much as the Fed, as inflation is less of a problem in the region.
“Rising rate expectations have been a clear headwind,” Fan says. “Important economic data points and central bank meetings have led to a lot of flip-flopping in sentiment.”
Indeed, investor sentiment recently fell to its most pessimistic level since the start of the pandemic, pressuring risk assets. A rotation from growth to value stocks has also been seen, with investors lowering their growth forecasts for the global economy.
Despite these pessimistic expectations, Fan believes investors can still find investment opportunities under the current market volatility.
Opportunities amid uncertainty
“We expect value stocks to continue their outperformance against growth stocks in the near term, as many value stocks fall under the energy and other commodity-related sectors which can benefit from price inflation,” Fan says. “Many financial stocks are value stocks offering high dividend yields, and they also benefit from improved net interest margin when rates go up.”
From a regional perspective, Fan is positive about the US and Asian stock markets.
US and Asia expected to show greater resilience
As the largest oil producer in the world, the US is energy self-sufficient, and therefore more shielded from energy price increases, Fan says, adding that its labour market remains healthy, meaning more support for consumer spending outlook.
“In Asia, we see good economic momentum, especially in ASEAN nations where vaccination rates are picking up, travel restrictions are being relaxed and reopening is accelerating. Our forecast shows that ASEAN is the only region that can deliver GDP growth acceleration from last year, which is rare elsewhere.”
Long-term structural trends
According to Fan, digital transformation and green transformation are two important structural trends that could drive growth and investments in the future.
“The digital transformation of consumer services and products is well underway, with mobile devices and smartphones at their core,” she says. “The corporate world, however, in many ways still appears to be at an early stage of its transformational journey. We see emerging opportunities in areas such as the metaverse, total security, smart mobility, automation and artificial intelligence, as well as biotech, genomics, and devices.”
In recent years much government policy worldwide has been directed at moving away from fossil fuels and reducing carbon emissions. “The energy supply shock stemmed from the Russia-Ukraine war triggers policymakers to think more about energy security. It will create opportunities for renewable energy and infrastructure companies such as smart grids and green-energy storage facilities,” says Fan.
Focus on quality
Overall, investors should focus on quality companies that can continue to generate steady earnings and resilient free cash flows in a more uncertain environment.
Fan says while market volatility will persist in the near term, investors should not give up their long-term focus on strategic investment opportunities from important secular trends. “A dip in the market may provide tactical buying opportunities to strategically invest in quality companies,” Fan concludes.
Investments in emerging markets may be extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect influences. Such characteristics can lead to considerable losses being incurred by those exposed to such markets.
This article is not a personalised communication from HSBC to you and does not constitute and should not be construed as legal, tax or investment advice or a solicitation of the sale or recommendation of any product or service. You should not make any investment decisions based mainly or solely on this article. All investments involve risks and may experience upward or downward movements and may even become valueless.
Issued by The Hongkong and Shanghai Banking Corporation Limited.