These countries, sectors and themes are set for a solid Q3
HSBC Tower at Canary Wharf Financial District in London, England
Mike Kemp | In pictures | Getty Images
HSBC believes that a healthy combination of economic growth, earnings and low rates continue to push stocks higher in the third quarter, but suggested that investors will now need to be more selective about geography, themes and sectors to better capitalize.
In a third quarter outlook report on Wednesday, HSBC Private Banking said high stock valuations are warranted in light of strong corporate earnings and abundant liquidity still lagging behind.
Willem Sels, global chief investment officer at HSBC Private Banking, noted that most of the good news for cyclical stocks – those that generally reflect the state of the global economy – has already been reflected. This includes record season results, unprecedented budget support. governments, reopening economies and deploying vaccines.
As the economic recovery continues to provide a favorable wind in the near term, Sels suggested that the market will struggle to offer any positive surprises and HSBC analysts expect a slowdown in sequential quarterly growth in GDP (domestic product). gross) during the rest of the year.
The UK lender also sees the current spike in inflation as temporary and expects the US Federal Reserve not to hike rates in the near term, with inflation fears causing volatility until the market is lower. comfortable with the outlook.
Sels suggested that now is the time to turn to specific sector calls and themes with the highest growth potential, while also selecting areas of the market that could benefit from recent policy promises.
“The first stage of the recovery was mainly driven by the global manufacturing industry, which continued to operate during the lockdowns. The next stage is expected to see stronger growth in services, with trade surveys suggesting a strong recovery in sentiment of service, ”Sels said.
With this in mind, HSBC maintains a preference for cyclical stocks overall, but with a focus on consumer return, buying consumer cyclicals such as airlines, autos and luxury goods, as well as Financials, another cyclical sector that Sels says “should remain well supported by lower funding, higher dividends and share buybacks.”
Salts and his team are also looking for select opportunities in consumer staples, which typically include essentials such as food and beverages and household items.
Geographically, he suggested that the strongest “cyclical momentum” would be in the US and UK and HSBC holds “overweight” positions in both, along with China.
“Our overweight to China may come as a surprise as the data is no longer picking up, but we believe growth will outperform market expectations,” said Sels, adding that valuations are attractive following recent volatility.
“We believe the market fears of tighter lending conditions are overblown, the supply of credit is directed to the private sector and our growth forecast in China is still at a very respectable 8.5% for 2021. . “
With infrastructure investment declining in many large economies in recent years, HSBC stressed that governments are now considering investing in infrastructure as a way to increase current demand and rebuild amid the ongoing pandemic.
In the United States, for example, President Joe Biden’s $ 2.3 trillion U.S. jobs plan aims to improve transportation, clean energy, and social infrastructure – as well as semiconductor production – over a period of eight years.
Sustainability is also at the center of attention as governments continue to adopt and strengthen regulations and targets and HSBC sees this global ‘competitive race’ as creating ‘a new growth opportunity for countries and businesses’.
Growth stocks – companies are expected to grow at a much faster rate than the market average – were hit at the start of the year as rising Treasury bond yields raised concerns about high valuations. However, HSBC believes that, as yields stabilize, strong earnings growth posted by the industry in the first quarter should help boost tech stocks.
“The reopening will expand consumption beyond online retailers (so we’ve removed our theme of digital consumption), but strong businesses will need digital platforms,” Sels said.
“We launched a theme of total security, because the world needs increased cybersecurity, personal and health security, and healthy and healthy diets.”
China will remain the “growth engine” in Asia, which structurally overtakes developed markets and other emerging market regions, Sels said, adding that exciting opportunities lie in “high-end manufacturing, automation, electric vehicles, education and health services “.