HSBC Asset Management (AM) is starting to position more defensively in anticipation of a potential economic slowdown.
Yigit Onat, HSBC AM’s head of multi-asset Asia, told FSA in an interview that the firm expects market volatility to pick up in the second half of the year.
“We’re moving away from momentum technology to sectors that are better positioned for transition from late cycle to a slowdown,” he said.
This includes sectors such as utilities, consumer staples, and infrastructure because of their more stable cash flows in a tougher operating environment.
He added: “In terms of style, we like low volatility, value and quality because they provide portfolio resilience against a rise in market volatility which we think is likely to happen in the second half of this year.”
He said potential volatility could come from a wave of earnings estimate downgrades as investors dial down their risk in response to a slowdown.
It could also come in the form of an unexpected shock to supply chains as a result of rising economic nationalism around the world, he said.
Indeed, investors are weighing the implications of a potential Trump win in the US elections where the risk of higher tariffs imposed by the world’s largest economy could pose a risk to economic growth.
Despite the relative caution, Onat said his team continues to be broadly constructive on risk assets, albeit with a more defensive positioning.
“We prefer fixed income over equities, and we have a bias towards quality and selectivity in both credit and equities,” he said.
A bumpy landing
The asset manager’s central scenario is for a “bumpy landing” Onat said. This would see economies experience something between a soft landing and hard landing.
“We believe this because although consumer and corporate balance sheets remain healthy, the economy is slowing down as tight financial conditions progressively hurt.”
He pointed to the recent negative market reactions to the labour market and economic prints in the US as evidence of this thesis.
He said: “Inflation is in line with central bank targets, and in our central scenario, we think recession will be avoided.”
That being said, he warned that the probability of a faster slowdown in economic activity is rising gradually.
“Consequently we pay more attention to labour market data, which is one of the indicators that informs our tactical asset allocation,” he explained.
When it comes to fixed income allocation, he said that “monetary policy normalisation is good for bonds, this is why we’re overweight government bonds and duration.”
Indeed, when the US Federal Reserve surprised markets with a 50bps interest rate cut, its dot plot projections showed a total of a further 250bps of cuts – which reiterated their intention to normalise monetary policy.
Onat however is less optimistic on credit, due to historically tight credit spreads, and has a preference for investment grade versus high yield.
“Having said that, we like Asia high yield, where spreads have already reflected a good amount of widening,” he said.
He is also cautious on emerging markets: “As far as emerging markets are concerned, momentum is still lagging, but there are interesting stories within Asia and we like India as it’s a structural growth story.”
