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Outlook 2020

The Age of Uncertainty


Outlook 2020
The Age of Uncertainty

The age of uncertainty adds further importance to being dynamic in how we build our portfolios, and expanding our investment strategy across more geographies and asset classes.

Mid-Year Investment Outlook – The trend accelerator

In this video, Joanna Munro, Global Chief Investment Officer, shares her views on the investment outlook for the second half of 2020.

Play the Mid-Year Investment Outlook podcast


As countries emerge from lockdown and testing becomes more widespread, we will have a better idea of how the rest of this year will unfold. But for now, diversification and resilience remain key.

Joanna Munro, Global Chief Investment Officer, HSBC Global Asset Management


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What has happened in markets and the economy in 2020 so far?

Recovering global growth

  • After a period of a slowdown in 2019, a number of leading indicators seems to be showing signs of recovery in the economy
  • Looking ahead, we anticipate modest recovery in Europe, stability in Asia and Emerging Markets, and the US* continuing around its long-term growth potential

Selective opportunities

  • While risk of deterioration in the economy and investment markets can be limited by policy easing, broad uncertainty also has the potential to limit gains
  • Even so, we see a number of good opportunities for yield or carry in select fixed income and equity markets

Political uncertainties

  • Political uncertainty remains a key challenge for investors because they can impact markets quite strongly
  • For instance, next year’s US election, Brexit and trade tensions can all be potential contributors to uncertainty in 2020

*Source: HSBC Global Asset Management, US long-term growth trend around 2 per cent, November 2019


  • Uncertainty appears to be having an effect on companies’ investments. However, policy easing by the Federal Reserve (US central bank) and robust consumer spending should allow US growth to stay along the path of its long-term trend


  • Growth has recovered somewhat, but any further pick up is likely to be gradual given that headwinds from trade uncertainty are likely to persist, while policy easing from the central bank has been relatively modest

Emerging Markets

  • Asian emerging markets, in particular, appear to be recovering. Conditions look to be in place for reasonable economic growth in 2020


  • A gradual improvement in emerging markets should help European exports. The European Central Bank’s (ECB) policy easing should also support domestic demand, leading to a modest recovery, which in turn would also benefit the UK



Multi-asset outlook

We believe there are still a number of opportunities for investors today. Market prices remain attractive for some risky asset classes, especially versus the traditional fixed income areas, where yields are low. That means we should still be pro-risk in our asset allocation.

The age of uncertainty

Overall, policy and political uncertainty have been elevated. Trade tensions between China and the US have been the dominant story, of course, but other events have impacted market sentiment too. We can track this quantitatively; statistical measures of “global policy uncertainty” are at all-time highs.

There are a number of big, unresolved issues and a sequence of other key political events that could play out adversely - or perhaps, better-than-expected for the economy and financial markets.

Investors should understand that continued uncertainty can potentially cap growth in economies and investment markets. Accommodative policies can continue to provide support, but we don't expect significantly more from central banks next year.

Favourable baseline looking forward

We see the global outlook as one of slow but steady growth, muted inflation and mildly supportive monetary policy in 2020. We call it the “favourable baseline”.

With many political and economic unknowns, we will need to be vigilant. However, the really big lesson from 2019 is that even if uncertainty remains prevalent, we shouldn’t automatically be seduced into adopting a defensive investment strategy. Going into cash at the start of 2019 felt safe and sensible, but it turned out to be very costly for those investors who did.

Compounding the carry in 2020

We believe there are still a number of opportunities for investors today. Market prices remain attractive for some risky asset classes, especially versus the traditional fixed income areas, where yields are low. That means we should still be pro-risk in our asset allocation.

However, given that uncertainty has the potential to limit gains next year, we prefer opportunities to "compound the carry" (carry refers to the return from holding an asset). Asset classes like emerging market equities and European equities can offer such opportunities, with higher dividend and earnings yields.


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How has the first half of the year been for equities?

As the COVID-19 story began to unfold in late January, a number of sharp sell-offs resulted in a one third drop in US dollar terms across developed and emerging equity markets by mid-March. The sudden crash in crude oil prices in the same period compounded the crisis.

Since then, equity markets have rebounded as governments and central banks implemented various fiscal and monetary controls. The recovery has been uneven, however. US technology stocks raced ahead and onshore Chinese equities have clawed back most of their losses. Meanwhile, certain emerging markets (India, Indonesia, the Philippines, Brazil and Colombia) are still reeling from currency devaluations, local dynamics and worries that the pandemic is not behind them.

How do we see equity investment opportunities for 2020?

We believe regional and country differentiation has come to the fore during this crisis, highlighting the importance of selectivity. Our preferred region for equities remains Asia, but with a bigger focus on the more developed markets such as China, South Korea, Taiwan and Hong Kong. In addition to being attractively valued, they have lower exposure to commodities and oil, and have proven themselves to be better equipped to cope with the COVID-19 crisis.

Despite a significant hit to corporate earnings and dividends, our equity valuation model suggests that the return investors can expect from equities over risk free assets – the so-called equity risk premium – remains attractive. Though there are several unknowns that could potentially impact our projections, we believe that in the long run – despite any near term hit to earnings and dividends – equities currently look well priced.

There could be different but equally uneven recoveries, perhaps where demand is more resilient but the supply side takes longer to get back on track. Obviously, a major development such as the availability of a vaccine could trigger a rally in equity markets.

And what about the longer-term picture?

We are seeing many changes in human behaviour, supply-demand dynamics, consumption patterns and environmental factors due to the pandemic. While we are doubtful about the lasting impact of many, we believe some will endure and accelerate existing trends. As an example, a number of e-commerce enabled companies have proven to have robust business models and can potentially reap the benefits of changing consumption behaviour in future.

Likewise, it is reasonable to expect public and private entities to take steps to strengthen healthcare infrastructure, increase capacity and build adequate buffers – which is a positive for companies in related sectors.


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What themes have emerged?

We see the COVID-19 pandemic, like most shocks and major events, as an accelerator of pre-existing patterns, more than a disruptor. It is reinforcing key trends that were already developing in fixed income, such as low inflation connected to workforce vulnerability, differences in central bank support causing dispersion between countries, and acceleration of responsible investing.

However, the pandemic is also a credit shock, causing some trends to reverse. A clear example will be credit tightening and balance sheet repair in response to a wave of defaults and ratings downgrades.

How do we see 2020 for bonds?

A key driver will be the renewed ‘low for long’ theme in developed market interest rates, resulting in what we expect to be modest returns for government bonds.

For corporate bonds, we expect some bifurcation within developed markets, with a split between companies that are in scope of central bank support programmes, and those that aren’t. This creates strong incentive for companies to maintain their investment grade ratings in order to benefit from lower coupon rates and cheaper funding.

Companies not in scope will be challenged. Funding difficulties will magnify concerns with lower quality bonds, adding to industry-specific issues (for example in retail, leisure, transportation and energy).

Regionally, we see relative value in Asia, where yields have increased. This preference is also driven by the region’s effectiveness in coping with the pandemic, along with a rapid monetary and fiscal response. Asian markets have more latitude to digest rises in public deficits and are better equipped for the current environment due to social discipline and broad use of technology.

Credit selection remains crucial however, given divergent paths of companies and industries.

Within the high yield space, our preference is for US over Euro. We expect greater challenges to economic growth recovery in Europe, which has had a more wide scale spread of COVID-19 infections, along with more constrained public finances to support growth recovery compared to the US.

What are the key risks to our outlook?

Looking ahead, one important long-term consideration will be the debt overhang, as companies and governments move to pile on more debt. This does not bode well for a prolonged recovery.

In a bleaker scenario with a very slow recovery, the debt overhang would create a situation where companies don’t invest and governments have to raise taxes to reduce deficits. In this situation with nationalisation of debt, yields get lower and lower, which is not a very negative scenario for credit.

Spotlight on Asia

2020 Asia Investment Outlook

We may see a bit of a manufacturing-led recovery in the global economy... which will be very positive for Asian bonds and equities.

Bill Maldonado
Global CIO Equities, CIO Asia-Pacific, HSBC Global Asset Management
Read in PDF formatEnglish, PDF, 1.39MB
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Risk Warning

The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance is not a reliable indicator of future performance. Any views and opinions expressed are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. We accept no liability for any failure to meet such forecast, projection or target.