Guest Spot: The Restoration Economy
- Author : David Macfarlane
- Date : 11 Mar 2021
“While 2020 was one of the most challenging twelve months we may ever face – as investors and as human beings – it is wonderful to be ending the year on a ray of hope. Encouraging results from a number of vaccine trials mean that 2021 could well be defined by markets – and our lives – slowly returning to normal. At HSBC Global Asset Management, we are calling this phase ‘the restoration economy’ – and it dominates our investment outlook for next year.”
Joanna Munro – Global CIO
What do we mean by ‘the restoration economy’?
It is where global growth moderates after the extraordinary rebound in activity we’ve experienced over the past six months. It also refers to our forecasts for returns. Because of the unprecedented speed of the rally in most asset classes since March, expected returns are still attractive but are now lower across the board as we’re coming off a higher base.
To help understand our thinking, we will cover in this article a summary of our macro outlook, house view, key risks and thoughts on the policy outlook. More details on our 2021 Investment Outlook is available here.
- We are in the restoration phase of the economic cycle. Activity remains below pre-Covid levels, everywhere except China
- The pace of recovery will depend on where we are in the world, on the delivery of the vaccine, and on continued policy support. In some laggard economies, there is scope for cyclical catch-up in 2021
- Abnormally-high unemployment rates, stressed corporate balance sheets, and fragile confidence means that the global economy needs ongoing policy support
- There is little risk of a sustained rise in inflation in the near-term
- After the fast rally in 2020, prospective risk-adjusted returns for a variety of asset classes have fallen
- Nevertheless, in a year of restoration, allocating to equities still makes sense, but we will need to be dynamic in managing regional exposures
- Furthermore, there are still attractive valuation opportunities in certain parts of global markets. Emerging Market (EM) fixed income should benefit from a weaker dollar. Many alternative asset classes (e.g. Private Equity) should also do well, in our view
- It is getting harder to find affordable and consistent hedges – we advocate a range of “new diversifiers” to build portfolio resilience
- Recent events have reduced key policy uncertainties. The age of policy uncertainty has ended
- Global central banks continue to rapidly expand balance sheets. Major central banks have now adopted lower-for-even longer interest rates
- Compared to the West, monetary policy in China is set to become relatively hawkish. The People’s Bank of China (PBOC) will focus on liquidity and targeted measures. Across Asia, incremental stimulus will be limited
- US-China tensions inevitably persist, but the Regional Comprehensive Economic Policy (RCEP) trade agreement sets a new tone and will have a meaningful economic impact
An important consequence of the crisis and fast rally in 2020 is that the capital market line – the structure of asset class expected returns and risks – has shifted down and flattened. As we have mentioned, there are still attractive investment opportunities but expected returns are lower for longer; this means it is even more important than ever to pay attention to the costs investors pay.
Low cost and actively managed multi-asset solutions provide a way to allow investors to access a strategy that can help navigate the changing environment and importantly, keep a higher proportion of any returns they get. At HSBC, we manage a range of low cost multi-asset strategies that are actively managed in both a fund and MPS structure. If you would like more information, please contact Natasha Crosby in our Business Development Team:
020 3359 1197
Source: HSBC Global Asset Management, Global Investment Strategy, January 2021. The views expressed are those of HSBC Global Asset Management, they were held at the time of preparation, and are subject to change.
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