HSBC cuts exposure to equities in strategic portfolio

HSBC has significantly cut its exposure to equities in its strategic portfolio while keeping a defensive tactical position, with 76% in bonds.

“The tricky trinity of deteriorating global growth, reduced policy options and unattractive valuations are likely to act as a headwind for risk assets, in our view. Our asset allocation thus focuses on safety and carry,” the bank said.

It expects two themes to dominate markets next year: the path of Federal Reserve rate hikes and the effectiveness of China stimulus.

It said that with the HSBC Leading Indicators pointing to global cyclical weakness, the trajectory of Fed hikes is likely to be shallow, which should continue to support any assets offering yield.

The bank cut its equity position by 16 percentage points, reducing developed market equities by 11 percentage points and emerging markets by 5pp, taking its total equity allocation down to 25%.

HSBC said it was long emerging markets bonds, USD high-yield credit and US Treasuries.

The bank said although EM faces structural and cyclical hurdles, valuations on bonds “offer support in a low-yielding world”.

Its key longs are 10-year bonds for India, Mexico, Hungary and Israel.

As far as USD high-yield credit is concerned, it said both relative expectations and valuations set high-yield apart from other risk assets.

“Implied default rates suggest markets are pricing in a recession and risk premia have decoupled from equity markets.”

On US Treasuries, it said deteriorating global growth, restricted policy options and limited risk premia in equity markets suggest long-duration fixed income is still likely to perform.

The bank has a zero allocation to the S&P 500 as it sees significant hurdles for US equities next year. It reckons margins will come under pressure from the lagged effect of a strong dollar, improving real wages and a deteriorating global growth picture.

HSBC’s preferred exposure is to the Euro Stoxx, the Nikkei, China 'A' shares and the Mexico IPC index.

The bank forecasts two rate hikes from the Fed next year and a December lift-off.

“As the Fed looks to tighten policy, Chinese monetary policy is likely to ease further. Policy makers believe keeping growth rates above 6.5% is imperative given their efforts to achieve 2020 GDP targets and avoiding a middle-income trap. However, the decline in global demand has thrown sand into the Chinese manufacturing growth engine.”