Five insights in five minutes
Our recent India Insights report explained that the pop in inflation there was due to short-term supply-side constraints feeding into food and beverage prices. Meanwhile, in China Insights, we showed that the correlation between mainland producer and consumer prices has actually been negative for the past five years. This week the debate over whether inflation is transitory or not moves to America, with June posting the highest annual rise in prices in three decades (if you exclude a blip in 2008 when oil spiked to $150 per barrel). We remain in the transitory camp, and calculate that two thirds of the month-on-month increase was due to energy and sectors that are re-opening post pandemic, such as used and rental cars, airlines, restaurants, hotels and so on. Inflation alarmists also point to more US small businesses raising prices than at any time in 40 years, and job vacancies at a record high. Whether there is slack in the labour market is hence a key question. One little-discussed observation suggests there is: Americans are re-joining the workforce at a much faster rate in states that ended pandemic benefits early. As more states follow, wage pressures should moderate.
Investment relevance: all asset classes
In their hunt for income, investors continue to embrace global high yield corporate bonds – and rightly so as economies rebound and cashflows surge (see note beneath). Although this has pushed yields to record lows, high yield credit spreads remain almost four times higher than their investment grade peers (350 versus 90 basis points) as of the end of June. Selectivity within the asset class remains key. Even if default rates are minimal for the remainder of the year (1.8 per cent according to Moody’s baseline scenario), spreads offered by the most fragile of high yield issuers (bonds rated CCC and below, representing around a tenth of the global market) barely overcompensate the risk. Hence our fixed income team sees far more value at the opposite side of the spectrum, within BB-rated issuers. So-called ‘fallen angels’ soon to be restored to investment grade status are particularly attractive. Finding yield these days is harder, but there are still pockets of opportunity for active asset managers to dip into.
Investment relevance: global high yield, Asia high yield, emerging market high yield
Contrary to what our readers in Italy or England may think, not everyone on the planet was following the European Football Championship over the past month (especially in South America!). But there are a trillion reasons why global investors should be eyeing the region’s equity markets. Thanks to Europe’s economy kicking-off, companies in the Stoxx 600 index, excluding financials, will make almost €1 trillion of free cash flow over the next two years, according to Bloomberg consensus data – no doubt spurring a leap in shareholder payouts or mergers and acquisitions, or both. If firms did nothing, net debt-to-ebitda for the benchmark would fall from 1.7 to 1.2 times. That would be the lowest level for a decade, and hence it would be inconceivable that European corporates wouldn’t begin raising debt. Assuming an appropriate leverage ratio for each sector between one time for cyclicals and three times for defensives, another €900-odd billion of funding could be available – making dividends, buybacks or deals even more likely. Fortza Europa!
Investment relevance: European equities, global equities, multi-asset, European credit
Chinese internet stocks
The CSI Overseas China Internet index and the Dow Jones Internet Composite index were marching arm in arm out of the March 2020 valley, until they didn’t. April this year marked the point of separation, since which the Chinese internet index has dropped 16 per cent whereas its US counterpart has gained 12 per cent. Clearly there is uncertainty arising from Beijing’s increased regulatory scrutiny over its own tech giants, as we wrote about last week. But President Biden also signed an executive order last week that addresses anti-competitive conduct in the internet sector, proving that stricter regulation is not exclusively a Beijing phenomenon. Not to mention the stronger fundamentals the main Chinese players have relative to their American peers – for example revenues have grown more quickly than they have for Fang stocks over the past five years, as seen in the chart below. And from a valuation perspective, the median 5.4 times enterprise value to sales ratio of the Chinese ‘big four’ is more attractive than the Fang’s 7.9 times.
Investment relevance: China equities, Asia tech, emerging market equities
The European Union this week proposed far-reaching plans to more aggressively reduce carbon emissions. This includes adding more industries under the Emissions Trading Scheme, through which companies must essentially pay to offset their emissions, and accelerating the reduction of carbon allowances. In our Mid-Year Outlook we highlighted the potential for carbon offsets to be portfolio diversifiers, given their independent set of price drivers. As regulations tighten, carbon prices are set to continue their steady ascent – up nearly 70 per cent this year alone in the EU. Adding to the good news for clean energy investors, US politicians joined Europe in proposing a carbon tax on imports. Should these plans become policy, it means carbon-intensive exporters such as China and India would be incentivised to speed up their energy transition plans, which, per the chart below, have lagged. Indian exports, for instance, are more than four times as carbon intensive as the US, and ten times more so than the EU.
Investment relevance: emerging market equities, Asian equities, European equities
For Professional Clients and intermediaries within countries and territories set out below; and for Institutional Investors and Financial Advisors in Canada and the US. This document should not be distributed to or relied upon by Retail clients/investors.
The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in Emerging Markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries and territories with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries and territories in which they trade. Mutual fund investments are subject to market risks, read all scheme related documents carefully.
The contents of this document may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. All non-authorised reproduction or use of this document will be the responsibility of the user and may lead to legal proceedings. The material contained in this document is for general information purposes only and does not constitute advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. We do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed herein are those of HSBC Global Asset Management at the time of preparation, and are subject to change at any time. These views may not necessarily indicate current portfolios' composition. Individual portfolios managed by HSBC Global Asset Management primarily reflect individual clients' objectives, risk preferences, time horizon, and market liquidity. Foreign and emerging markets. Investments in foreign markets involve risks such as currency rate fluctuations, potential differences in accounting and taxation policies, as well as possible political, economic, and market risks. These risks are heightened for investments in emerging markets which are also subject to greater illiquidity and volatility than developed foreign markets. This commentary is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.
We accept no responsibility for the accuracy and/or completeness of any third party information obtained from sources we believe to be reliable but which have not been independently verified.
HSBC Global Asset Management is a group of companies in many countries and territories throughout the world that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings Plc. (HSBC Group). HSBC Global Asset Management is the brand name for the asset management business of HSBC Group. The above communication is distributed by the following entities:
- In Argentina by HSBC Global Asset Management Argentina S.A., Sociedad Gerente de Fondos Comunes de Inversión, Agente de administración de productos de inversión colectiva de FCI N°1;
- In Australia, this document is issued by HSBC Bank Australia Limited ABN 48 006 434 162, AFSL 232595, for HSBC Global Asset Management (Hong Kong) Limited ARBN 132 834 149 and HSBC Global Asset Management (UK) Limited ARBN 633 929 718. This document is for institutional investors only, and is not available for distribution to retail clients (as defined under the Corporations Act). HSBC Global Asset Management (Hong Kong) Limited and HSBC Global Asset Management (UK) Limited are exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the financial services they provide. HSBC Global Asset Management (Hong Kong) Limited is regulated by the Securities and Futures Commission of Hong Kong under the Hong Kong laws, which differ from Australian laws. HSBC Global Asset Management (UK) Limited is regulated by the Financial Conduct Authority of the United Kingdom and, for the avoidance of doubt, includes the Financial Services Authority of the United Kingdom as it was previously known before 1 April 2013, under the laws of the United Kingdom, which differ from Australian laws.
- in Austria by HSBC Global Asset Management (Österreich) GmbH which is regulated by the Financial Market Supervision in Austria (FMA);
- in Bermuda by HSBC Global Asset Management (Bermuda) Limited, of 37 Front Street, Hamilton, Bermuda which is licensed to conduct investment business by the Bermuda Monetary Authority;
- in Canada by HSBC Global Asset Management (Canada) Limited which provides its services as a dealer in all provinces of Canada except Prince Edward Island and also provides services in Northwest Territories. HSBC Global Asset Management (Canada) Limited provides its services as an advisor in all provinces of Canada except Prince Edward Island;
- in Chile: Operations by HSBC's headquarters or other offices of this bank located abroad are not subject to Chilean inspections or regulations and are not covered by warranty of the Chilean state. Further information may be obtained about the state guarantee to deposits at your bank or on www.sbif.cl;
- in Colombia: HSBC Bank USA NA has an authorized representative by the Superintendencia Financiera de Colombia (SFC) whereby its activities conform to the General Legal Financial System. SFC has not reviewed the information provided to the investor. This document is for the exclusive use of institutional investors in Colombia and is not for public distribution;
- in Finland, Norway, Denmark and Sweden by HSBC Global Asset Management (France), a Portfolio Management Company authorised by the French regulatory authority AMF (no. GP99026) and through the Stockholm branch of HSBC Global Asset Management (France), regulated by the Swedish Financial Supervisory Authority (Finansinspektionen);
- in France, Belgium, Netherlands, Luxembourg, Portugal, Greece by HSBC Global Asset Management (France), a Portfolio Management Company authorised by the French regulatory authority AMF (no. GP99026);
- in Germany by HSBC Global Asset Management (Deutschland) GmbH which is regulated by BaFin;
- in Hong Kong by HSBC Global Asset Management (Hong Kong) Limited, which is regulated by the Securities and Futures Commission;
- in India by HSBC Asset Management (India) Pvt Ltd. which is regulated by the Securities and Exchange Board of India;
- in Italy and Spain by HSBC Global Asset Management (France), a Portfolio Management Company authorised by the French regulatory authority AMF (no. GP99026) and through the Italian and Spanish branches of HSBC Global Asset Management (France), regulated respectively by Banca d’Italia and Commissione Nazionale per le Società e la Borsa (Consob) in Italy, and the Comisión Nacional del Mercado de Valores (CNMV) in Spain;
- in Mexico by HSBC Global Asset Management (Mexico), SA de CV, Sociedad Operadora de Fondos de Inversión, Grupo Financiero HSBC which is regulated by Comisión Nacional Bancaria y de Valores;
- in the United Arab Emirates, Qatar, Bahrain & Kuwait by HSBC Bank Middle East Limited which are regulated by relevant local Central Banks for the purpose of this promotion and lead regulated by the Dubai Financial Services Authority.
- in Oman by HSBC Bank Oman S.A.O.G regulated by Central Bank of Oman and Capital Market Authority of Oman;
- in Peru: HSBC Bank USA NA has an authorized representative by the Superintendencia de Banca y Seguros in Perú whereby its activities conform to the General Legal Financial System - Law No. 26702. Funds have not been registered before the Superintendencia del Mercado de Valores (SMV) and are being placed by means of a private offer. SMV has not reviewed the information provided to the investor. This document is for the exclusive use of institutional investors in Perú and is not for public distribution;
- in Singapore by HSBC Global Asset Management (Singapore) Limited, which is regulated by the Monetary Authority of Singapore;
- in Switzerland by HSBC Global Asset Management (Switzerland) AG whose activities are regulated in Switzerland and which activities are, where applicable, duly authorised by the Swiss Financial Market Supervisory Authority. Intended exclusively towards qualified investors in the meaning of Art. 10 para 3, 3bis and 3ter of the Federal Collective Investment Schemes Act (CISA);
- in Taiwan by HSBC Global Asset Management (Taiwan) Limited which is regulated by the Financial Supervisory Commission R.O.C. (Taiwan);
- in the UK by HSBC Global Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority;
- and in the US by HSBC Global Asset Management (USA) Inc. which is an investment adviser registered with the US Securities and Exchange Commission.
- Are not a deposit or other obligation of the bank or any of its affiliates;
- Not FDIC insured or insured by any federal government agency of the United States;
- Not guaranteed by the bank or any of its affiliates; and
- Are subject to investment risk, including possible loss of principal invested.
Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided as an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively 'the MSCI Parties') expressly disclaims all warranties (including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)
Copyright © HSBC Global Asset Management Limited 2021. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Global Asset Management Limited.