Rebalance your portfolio now as the economy enters an expansion phase, HSBC says

HSBC Asset Management has told investors to prepare for the “mission economy” and an important shift in the macro regime. In its mid-year outlook report, seen exclusively by CNBC, the British lender said investors need to prepare for the business cycle to transition from recovery to expansion, bringing a period of lower investment returns and a shift toward “activist” fiscal policy.

Gross domestic product has recovered from the Covid plunge in the U.S., China and across industrial Asia and corporate profits are experiencing a V-shaped rebound, with 2022 earnings expectations now ahead of pre-Covid forecasts. This has led monetary policy debate toward timetables for tapering of quantitative easing programs, and HSBC suggested that this indicates that we are entering the mid-cycle, expansion phase of the business cycle.

“After a period when rising investor optimism lowered perceptions of risk and re-rated risky asset classes, the outlook is now the reverse,” Joseph Little, global chief strategist at HSBC, said. “Increasingly, valuations are set to become a drag on returns as a lot of good news about the recovery has already been factored into prices.” Little said value stocks — those which trade at a discount relative to their financial fundamentals and performance — continue to make sense against a backdrop of rising bond yields.

“We favour cyclical markets like the UK, Europe, and deep value EMs, while remaining nimble in allocations,” Little said. “The downside cyclical risk is the U.S. dollar, which is particularly important for our strategy favouring international equities and EM fixed income.” Alongside the cyclical transition to expansion, the shift in policy consensus in advanced economies is now reflecting a greater degree of “fiscal activism.”

Rebalance your portfolio now as the economy enters an expansion phase, HSBC says, CNBC, Jul 9