CIO Insights Featuring James Cheo, Chief Investment Officer, Southeast Asia, HSBC Private Banking and Wealth Management

CIO Insights Featuring James Cheo, Chief Investment Officer, Southeast Asia, HSBC Private Banking and Wealth Management

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Considering the turmoil and scepticism that plagued 2020, the global economy is starting to look considerably more positive in 2021 on the heels of a vaccine roll-out strategy, markets reacting positively to a new administration in the U.S.A and the slow, but steady opening up of most economies. As we head into a new decade, questions with regard to wealth creation, strategic investments and key investment themes may overwhelm global investors. To aide our readers and worldwide investor community, we interviewed James Cheo, Chief Investment Officer, Southeast Asia, HSBC Private Banking and Wealth Management. James Cheo, in this interview, elaborates on investment insights further discussing the macros and markets which could shape 2021 and beyond.

Macro-economic Indicators: Steady economic growth, corporate performance and accommodative rates will aid 2021

As global economic growth steady improves, there is a noted broadening of economic activity beyond manufacturing and digital. To aid this steady growth, a global vaccine roll-out should allow the consumer confidence to pick up, and the all-important consumer sector to become an additional engine of growth. At the same time, governments are rebuilding their economies, and the healthiest companies are investing to adapt to the new post COVID-19 realities and opportunities. Collectively, there is indication that global economy and corporate profits will significantly grow and also become healthier in 2021 as compared with the current circumstance. Further, accommodative rates on a global level by most central banks will also build investor confidence. With this in mind, we continue to see several interesting investment opportunities in EM Asia, which we prefer over other emerging markets. China’s dual circulation strategy, focused on measures to boost domestic demand, technological innovation and market liberalisation should further boost growth, give long term direction to investors and lead to fund flows into the region.

Asset Allocation: Some volatility and reflation will guide 2021

We believe it is key to be mindful of positive growth and rate fundamentals throughout 2021 to avoid being blown off-course. While we do foresee volatility on several fronts, much of it could also turn out to be just noise. Hence a cautious approach is advised. During 2021, oil price base effects may give the impression that inflation is picking up, and the economic recovery may trigger speculation about policy normalisation. Rising inflation is due to economic improvements. With this said, we remain invested with a pro-risk and cyclical stance, but with a selective approach and plenty of diversifiers, including gold, high rated bonds, hedge funds and other alternative assets.

Global Markets: Technology sectors and enablers will continue unabated

The broadening of the economic activity is aiding the sector leadership in the stock markets, and we thus hold overweight positions in technology, industrials, materials, consumer discretionary, financials and communication services. However, this broadening does not mean that technology – which had been principal engine of stock markets – will underperform in 2021.

The digital revolution, according to us, will continue unabated, and technology leaders should continue to see strong growth in the medium term. As tech leaders can be found outside of the tech sector as well, in areas such as automation, health technology and 5G, all related or impacted sectors will also witness growth. Technological leadership is one of the key determinants of whether a company is fit for the future. Hence it is safe to say that many value stocks have outdated business models which investors should be aware of and avoid.

Investments: Guided by China

The Themes: Most of our themes that are related to Asia is led by China.  The key investment trends that will shape 2021 and beyond are: (1) New Asia Consumers; (2) Riding on China’s Five-Year Plan and (3) Hunting for income in a Low Yield World; (4) Digital Transformation; (5) and China’s Green Revolution.

The Ideal Portfolio: We have a risk-on stance in our model portfolio, with overweights in global equities, investment grade and BB-rated high yield bonds, and hard currency emerging market bonds. We fund this principally through our underweight on safe haven bonds. In equities, we have a cyclical sector stance. Our stance and current positions are of the view that the global economy is recovering and rebuilding, hence earnings should improve. In addition to this, equity and credit valuations are supported by the low yield environment.

The Preferred Alternatives: 2021 should provide a rich opportunity set for good hedge fund managers. Markets’ focus on where inflation and rates are going can create volatility and opportunities. Hedge funds can pick winners and losers from the changes around COVID-19 and the digital revolution. Defaults and restructuring in this space will continue to provide opportunities for distressed hedge fund strategies. Further, Hedge funds continue to play a critical role in diversified portfolios, providing potential for uncorrelated and still attractive returns. We continue to adopt a barbell approach, looking for opportunities in credit and some equity strategies, while keeping our overweight exposure with macro and multi-strategy managers.

ESG Investing: ESG credentials could augment valuations in the new decade

In our view, ESG integration and responsible investing are no longer sufficient. In this new decade, we will see substantial migration of investors towards sustainable investing approaches, which we classify as Inclusion, Thematic or Impact investing. With such investment strategies, we not only look at ESG risks, but also ESG opportunities. ESG integration could have been sufficient if we were talking about a small change, but in our view, sustainability is a real revolution. In this respect, we think it is helpful to draw some parallels with digital revolution, to illustrate how investors should be handling it. When investors consider the effects of the digital revolution, they want to actively pick companies in each sector that use technology to their advantage, to help them to win the race against their competitors. Similarly, when it comes to ESG investing We think investors should keep these things in mind, and take a similar approach for sustainability. They should actively select companies with strong or improving ESG credentials to boost performance (inclusion approach) or seek out companies that are exploiting specific sustainability trends (thematic approach). The sustainability revolution is arguably as much as a game changer as the digital revolution. Sustainability should therefore be integrated both in the core portfolio strategy- where it can help investors outperform or reduce risks, and in thematic satellites – focusing on the opportunities.

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