HSBC Global Private Banking has moved to a clear risk-on strategy In its second quarter outlook as it is now overweight both bonds and equities.
While the private bank has been putting cash to work for the past year and even moved the cash holdings in its portfolio down to zero in September last year, it only moved to overweight global equities during the first quarter.
This added to its existing overweight position in fixed income.
Despite adopting a clear risk-on strategy, there remains a quality bias to its asset allocation decisions, while they continue to hedge tail risk via alternatives, notably private markets and infrastructure.
This focus on quality means that the bank continues to favour the US and one of its punchier calls is for the continued strengthening of the US dollar, due to its yield advantage, US economic resilience, investment flows and the potential scenario of another Trump presidency.
In equities, HSBC Global Private Banking said it moved overweight for two reasons. Firstly, the new-found realism regarding rate cuts as markets are now pricing in only three or four cuts this year as opposed to six previously.
Secondly, the economic data remains positive and the number of voices calling for a global or US recession has been steadily shrinking.
“The three fundamental cornerstones for a solid equity market – economic growth, earnings growth and the rates outlook – are all in place, in our view,” it said.
In equities, the bank’s quality tilt shines through in its preference for the US markets, due to US earnings resilience and the dominance of the tech sector, while it eschews Europe.
The bank also favours India, Indonesia, Korea and Japan when it comes to equities due to a variety of factors including India’s strong structural growth and Korea’s ability to capture the upside from the global economy’s ongoing digital transformation.
With regards to China, the bank is more circumspect, citing recent stimulus measures as a boon, but noting that before markets can really rally this needs to be translated into stronger economic growth.
Meanwhile, in fixed income, this focus on quality also shines through as credit spreads remain tight, meaning that the bank favours investment grade over high yield and also continues to extend duration ahead of policy easing.
With regards to alternatives, the bank favours infrastructure and private credit in particular due to inflation linkage in the case of the former and the fact that it mostly comprises floating rate notes in the case of the latter.
“We think our investment priorities find the right balance between exploiting the opportunities while focusing on quality and limiting exposure to areas where risks are mispriced,” said Willem Sels (pictured), global chief investment officer for global private banking and wealth at HSBC.
“Of course, risks remain in our complex world, but as we have seen, markets are happy to take some uncertainty in their stride as long as the earnings and rate fundamentals remain constructive.”
