Markets

HSBC sees 'swoosh-shaped recovery' with Asia leading the way

Key Points
  • China and industrialized Asia, including South Korea, Singapore and Taiwan, are best placed to capitalize on the recovery, while other emerging markets, smaller oil exporters, frontier nations and the euro zone are less resilient, according to HSBC Global Asset Management.
  • The report suggested that social and economic trends that were already gathering steam prior to the pandemic, such as the increased take-up of tech and focus on sustainability, will likely be catalyzed by the crisis.
HSBC tower at Canary Wharf financial district in London, England
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HSBC Global Asset Management anticipates a "swoosh-shaped recovery" for the global economy as it emerges from the coronavirus crisis, with China and industrialized Asia the best positioned economies.

In a mid-year outlook report seen by CNBC, Global Chief Strategist Joseph Little said this manner of recovery entails a sharp rebound once lockdowns are lifted, followed by a gradual pickup to pre-crisis levels of activity.

"Working backwards, it means the recovery has begun already in this quarter. By the end of next year, the global economy should be fully established on a new, lower trajectory, but a roughly similar trend growth rate," Little said.

China and industrialized Asia, including South Korea, Singapore and Taiwan, are best placed to capitalize on the recovery, while other emerging markets, smaller oil exporters, frontier nations and the euro zone are less resilient, according to HSBC GAM.

Downside risks to this scenario, Little outlined, include policy flexibility in certain economies, the risk of a second wave of Covid-19 infections and the potential for permanent economic damage. However, he suggested that policy mistakes pose the greatest risk to recovery.

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"The global crisis-mode response has been as good as we could have hoped. But, following the liquidity measures, solvency challenges remain," Little said.

"We also question whether a form of 'stimulus fatigue' could eventually set in, with policy support ending too soon."

Despite this, Little highlighted that there is plenty of easing capacity remaining for most governments and central banks, and investors seem "readier than ever to let governments break fiscal taboos."

Alternatives to play a greater role

HSBC GAM predicts that the coronavirus crisis has accentuated a "steep trade-off between risk and returns," with current prices suggesting sub-inflation returns for most medium-term government bonds and riskier asset classes discounting much higher rewards.

"With government bonds not being attractive from a valuation perspective and their hedging properties becoming increasingly limited as interest rates approach zero, investors need to think harder about how they diversify," Little argued.

HSBC GAM favors global equities and high-yield bonds on a strategic, long-term basis, projecting that lower equity prices this year mean that investors willing to absorb short-term volatility will be compensated by higher prospective returns over the next two years.

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Falling developed market government bond yields have bolstered the relative attractiveness of equities, while significant policy easing has reduced some of the downside risk, the report said.

"Spreads on high yield bonds are relatively high in our view and the credit risk premium – the compensation for bearing corporate default risk – looks attractive," Little said.

"We continue to prefer Asian credits to developed markets ones as they continue to offer higher spreads for similar credit risk, and the region is well positioned for recovery," he added, highlighting that policy support from China will be key to this asset class.

Compared to other major countries, experts have pointed out that China has offered limited support to its economy amid the crisis, deploying around 2.6 trillion yuan ($365.97 billion) of fiscal measures, according to the IMF.

HSBC GAM strategists believe that both liquid and illiquid alternatives should play a greater role in investor portfolios for the remainder of the year, particularly those with little correlation to traditional asset classes and some protection from the downside risks to equity markets.

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Little flagged some liquid hedge fund strategies and private equity as options, though the latter may not be suitable for some investors due to illiquidity and leverage.

The report suggested that social and economic trends that were gathering steam before the crisis will likely be catalyzed further.

"Trends such as the increased take up of technology and a focus on sustainability are impacting all asset classes and, together with the market reaction to the crisis, create selective opportunities, with a greater emphasis on regional allocation, styles and sectors," Little concluded.