A lose-lose situation may be emerging for risk assets this year, according to HSBC strategists.
If economic growth rebounds in line or above expectations, this will open the door for “fairly aggressive” tightening from the U.S. Federal Reserve, HSBC strategists led by Max Kettner said in a note. On the other hand, even if supply chain issues dampen recovery--a scenario that HSBC sees as more probable - the Fed is unlikely to quickly change its strategy, resulting in “further deterioration of the growth-inflation trade-off.”
Worse still, a combination of both scenarios could play out: “If we get a combination of both decelerating growth and more tightening priced in the next six months, then the first half could indeed be quite nasty for risk assets,” Kettner said by email.
Against this backdrop, stocks are expected to deliver meagre returns in a “fade the rally” year, according to HSBC. While Kettner raised his year-end target for the S&P 500 index by 5.4% to 4,900 points, this implies a tepid 4.8% upside for the U.S. benchmark from its current levels, a far cry from last year’s 27% rally.
Global equities have had a rough start to the year as investors fled frothier parts of the market, like technology, amid concerns about the Fed’s more hawkish stance and rising bond yields. In contrast, cheaper and so-called value sectors, like banks, have outperformed.
Within US stocks, HSBC prefers the small-cap Russell 2000 Index over the S&P 500 and tech-heavy Nasdaq 100 because investors have been less optimistic about small caps’ earnings. Even as the strategists recommend refuge in more defensive sectors and regions, such as Swiss equities, staples and health stocks, they also advise that investors don’t jump on the value train just yet, as a near-term pullback is expected following their recent rally.
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“We still think the consensus is too sanguine on the outlook for risk assets,” Kettner said in Monday’s note. “The only thing that prevents us from cutting risk assets now is the still downbeat sentiment and positioning.”
Photo: Bloomberg
