2021 Investment Outlook
Message from our Global CIO
While 2020 was one of the most challenging twelve months we may ever face – as investors and as human beings – it is wonderful to be ending the year on a ray of hope. Encouraging results from a number of vaccine trials mean that 2021 could well be defined by markets – and our lives – slowly returning to normal. At HSBC Global Asset Management we are calling this phase ‘the restoration economy’ – and it dominates our investment outlook for next year. The restoration economy is one where global growth moderates again after the extraordinary rebound in activity we’ve experienced over the past six months. It also refers to our forecasts for returns. Because of the unprecedented speed of the rally in most asset classes since March, expected returns are now lower across the board. Still attractive, but less so as we’re coming off a higher base. That said, I am pleased to say there are still many interesting opportunities around the world for investors. We see attractive valuations in global credit, emerging markets and alternative asset classes. Asia in particular is a bright spot. The region has weathered the virus well and is showing admirable economic resilience – high yield bonds are compelling from a valuation perspective and small cap equities are attractive for the medium term. As Chief Investment Officer, one of my roles is to ensure that our portfolio managers and analysts have everything they need to take advantage of these opportunities – especially as asset class returns moderate slightly, as we expect them to. To this end we continue to invest in our platform, develop our people and bring in new talent, as well as deepening our commitment to sustainability, which we believe adds value in the long run. I am very much looking forward to 2021 and wish all of our clients a happy and prosperous new year.
Global Chief Investment Officer, HSBC Global Asset Management
Macro and Investment strategy outlook
Global Chief Strategist
Prospettive di Investimento 2021
It has been an eventful year for investors, navigating both the fastest bear market and the fastest recovery ever. While central banks supported the economic system and drove asset markets to rally, we are now in a regime of ‘lower for longer’ rates and a lower and flatter capital market line. Yet, we see selected pockets of attractive valuations in global credits, emerging markets and alternative asset classes.
We expect 2021 to be a period of gradual restoration for economies, where the pace and vigour of that restoration will depend on local and regional dynamics, the strength of policy support and availability of a vaccine; and where sustainability comes increasingly into focus, driven by ambitions for an improved new normal.
A year of continued economic recovery should support profits, so in terms of portfolio positioning, we think it is too risky to be selling or underweight the ‘restoration economy’.
Fixed income outlook
Global CIO Fixed Income, Private Debt and Alternatives
Prospettive di Investimento 2021
Amidst low inflation, lower for even longer interest rates are broadly assured to contain heavy fiscal debt loads and avoid economic growth falling below potential. With this backdrop we expect flat government bond returns over the coming 12 months.
More conservative balance sheet management should now be needed for corporates. However, segmentation between winners and losers is apparent, based on uneven recovery, the acceleration of trends such as digitalisation, and eligibility to central bank programs. These distortions make issuer selection vital, most particularly at the lower end of the high yield segment.
We believe a focus on selection and willingness to be nimble will add value in this environment. Our medium term preference is for Asia, which offers stability, value and diversification benefits. We generally prefer the US in developed markets based on stronger economic prospects, and see broad value in emerging markets debt, particularly in local currency, and opportunities in asset backed securities.
Global CIO Equities, CIO Asia Pacific
While policy support has driven the sharp recovery in equities, there have been striking differences in the performance of various segments. Regional divergence can be explained by how countries coped with the Covid-19 crisis. But for some markets, particularly the US, even more significant has been investor bias towards defensive growth stocks. This has introduced large skews in equity markets and investors’ portfolios.
Some markets now appear grossly undervalued in the aftermath. Laggards could potentially make a strong comeback once the vaccine situation becomes clearer and economic recovery gains momentum. Nonetheless, drivers for this year’s outperformers remain. For instance, healthcare companies that took centre stage amidst the public health crisis will likely continue to outperform, backed by strong expected earnings growth in 2021. Furthermore, with Covid-19 continuing to dominate headlines, industrialised Asia remains a preference for us, where fundamentals are strong relative to the rest of the world.
Global CIO Multi-Asset
Steady fiscal and central bank support leaves us reasonably positive on risk assets on a 12-month horizon, but we expect a bumpy path and near-term vulnerabilities as news develops. This means an active approach will be important for asset allocators. We maintain a moderate equity overweight, more modest overweight to corporate bonds, and favour other defensive strategies over sovereign bonds. Liquid alternatives, particularly managed futures and trend following strategies, should play an important role in delivering diversification.
The global cyclical recovery, China growth outperformance and areas of deep value favour most emerging market asset classes. In equities we combine overweight positions in defensive North Asian markets with cyclical markets such as Brazil to build a barbell strategy. Divergence within asset classes, such as the opposing paths of cyclical and digital economy stocks, supports a focus on intra-asset class allocation. We prefer a disciplined return to lagging markets to navigate timing tensions between vaccine news, fiscal policy and weaker growth.
Responsible investing outlook
Global Head of Responsible Investing
As an early signatory to the United Nations supported Principles for Responsible Investment, we are committed to embedding environmental, social and governance (ESG) factors into our investment decisions. We do not assimilate ESG integration in a ‘one-size-fits-all process’. Based on our financial materiality analysis, ESG factors have different degrees of impact on firms’ financial strength, depending on the nature of the sector or industry in which they operate.
Needless to say, the Covid-19 crisis has driven particular traction in social criteria. Prior to the pandemic we found that social issues formed a significant part of our assessment on all sectors. With greater regulatory emphasis on items such as workers’ health and safety, benefits and temporary jobs, challenges will now be magnified for firms not dealing adequately with these paradigm shifts.
Attention to social policies and procedures is beginning to be a financial necessity, as evidenced by this year’s outperformance of ESG leaders.
Global CIO Fixed Income, Private Debt and Alternatives
In the world of lower-for-longer expected returns, embedding alternative allocations into our portfolios needs to become mainstream. Both liquid and illiquid alternatives offer value as diversifiers.
The case for substituting some listed equity for a private equity allocation is strong, where returns are tilted to high-beta, small-cap and value factors, which should do well as recovery progresses. Hedge funds also present a compelling case, with interesting opportunities alongside particular ability to mitigate the downside and offer de-correlation to risky assets. This is important given challenges to hedging properties of core bonds in a low rate environment.
We believe that public markets are currently undervaluing real estate equities, which are priced to deliver attractive long run returns based on conservative future growth assumptions. While in infrastructure debt, we continue to see good opportunities to deploy capital in developed markets across the capital spectrum. Higher yielding strategies may present a notable opportunity to take advantage of superior returns.
Global CIO Liquidity, CIO USA
‘Lower for even longer’ has moved negative rate considerations back up the agenda for money markets. While we are prepared to manage negative yields should they occur, our expectations remain that the gradual fall in money market rates will soon level off in most developed market currencies. We look to have longer duration where there is room for rates to go lower in some yield curves.
With central bank support having driven massive tightening of credit spreads from earlier in the year, investors are now incentivised to seek additional credit risk which may not be sufficiently rewarded. Careful attention to issuer selection is important, with a focus on liquidity resiliency. To this point, we think it is prudent for money market funds to maintain sufficient liquidity buffers. Availability of a Covid-19 vaccine at some point in 2021 does not preclude potential for further market disruption on the back of a wider and more protracted second phase of the virus.