HSBC warns of a forthcoming U.S. recession this year
HSBC Asset Management has warned that the United States is expected to experience an economic downturn in the fourth quarter of this year, with Europe following suit and entering a recession in 2024. The asset manager’s midyear outlook emphasizes that recession warnings are becoming increasingly significant for several economies. At the same time, fiscal and monetary policies are not aligned with the performance of stock and bond markets.
Joseph Little, the chief global strategist at HSBC Asset Management, noted that although specific sectors of the economy have shown resilience thus far, the overall risks indicate a high likelihood of a recession. Europe is expected to lag behind the United States regarding timing, but the general macro trajectory aligns with the possibility of a recession.
Little further highlighted that there is already evidence of a mild profit recession and increased corporate defaults. However, he also mentioned a potential silver lining in the form of expected moderation in high inflation, which could create an opportunity for policymakers to implement interest rate cuts.
Despite the central bankers adopting a hawkish tone and the persistence of inflation, especially in core measures, HSBC Asset Management anticipates that the U.S. Federal Reserve will lower interest rates before the conclusion of 2023. Furthermore, they predict that the European Central Bank and the Bank of England will implement interest rate cuts the following year.
HSBC Asset Management’s outlook suggests that despite the current stance of central banks signalling a more cautious approach to monetary policy, they anticipate a shift towards easing measures shortly. This projection considers various factors, including the potential economic downturn, rising recession risks, and the need for policymakers to counterbalance the impact of inflation.
While the current environment may present challenges and a seemingly conflicting situation with inflationary pressures, HSBC Asset Management expects central banks to adjust their monetary policies by reducing interest rates. However, it’s important to note that future policy decisions are subject to change based on evolving economic conditions and the decisions made by central bank authorities.
During its June meeting, the Federal Reserve paused its monetary tightening cycle, keeping the fed funds rate target range from 5% to 5.25%. However, they indicated two more interest rate hikes can be expected later this year. Market expectations, as reflected in CME Group’s FedWatch tool, suggest slight anticipation of a quarter percentage point increase in the Fed funds rate by December.
HSBC’s Joseph Little acknowledged that central banks could not cut rates significantly if inflation remains well above target, as in many major economies. Therefore, he emphasized the importance of the recession occurring early enough, as it could lead to disinflation.
Regarding the projected recession, HSBC anticipates a scenario similar to the early 1990s, with a potential 1-2% decline in GDP as their central scenario.
HSBC expects the recession in Western economies to have a challenging and volatile impact on markets for two primary reasons. Firstly, there has been a rapid tightening of financial conditions, leading to a downturn in the credit cycle. Secondly, Little notes that markets do not appear to be pricing in a particularly pessimistic outlook for the global situation.
HSBC’s Joseph Little believes that the next six months could present challenging news for the market, especially considering it is currently pricing in a “soft landing.” He suggests that this upcoming recession will not eliminate all inflation pressures, implying that developed economies may face a period of higher inflation and interest rates in the long run.
Given this cautious outlook, HSBC carefully approaches risk and cyclicality in portfolios. They find interest rate exposure attractive, particularly in the Treasury curve, focusing on the front and middle sides of the curve. Additionally, they see some value in European bonds.
Regarding credit, HSBC adopts a selective approach, emphasizing higher quality credits in the investment-grade category over speculative investment-grade credits. They express caution toward developed market stocks.
HSBC is optimistic about China’s economic prospects as the country emerges from stringent COVID-19 lockdown measures. They expect high levels of domestic household savings to continue supporting domestic demand. Additionally, HSBC believes that the problems in the property sector are reaching their lowest point, and government fiscal efforts will help create jobs.
Joseph Little of HSBC also noted that low inflation in China allows for further monetary policy easing. He expects GDP growth to surpass the government’s modest 5% target this year, considering the economy’s gradual recovery.
Given these factors, HSBC maintains an overweight stance on Chinese stocks. You little emphasized the importance of recognizing the diversification opportunities present in Chinese equities.
Joseph Little of HSBC highlights that in contrast to developed stock markets, value stocks outperform growth stocks in China and Asia.
Little also identifies India as the primary macro growth story for 2023. The Indian economy has rebounded strongly from the pandemic due to a resurgence in consumer spending and a robust services sector. He describes the current economic conditions in India as a “Goldilocks” mix, with recent positive surprises in growth and downward surprises in inflation.
Little further notes that government subsidies have supported improved corporate and bank balance sheets in India. Additionally, he highlights that India’s structural and long-term investment prospects remain intact.
