Mumbai: Amid prevailing pessimism about the economic cycle, Joseph Little, global chief strategist at HSBC Global Asset Management, contends that global economic fundamentals continue to look good. As an investment strategy, HSBC is currently focused on emerging markets and considers India to be a safe haven, Little said in an interview. He added that there is no sign of an imminent recession, but economic trends indicate that there is a cyclical slowdown. Edited excerpts:
Volatile crude, strong dollar and rising yields in US amid trade tensions kept investors on tenterhooks in 2018. What is your reading of last year?
2018 has been a disappointing year for investors. After the stellar investment returns of 2017, perhaps it was always likely to feel this way. The good news is that, despite current pessimism about the economic cycle, the fundamentals continue to look good. But the investment themes are changing. 2018 was a really difficult year for investors looking both at global equities and bonds as it was not just poor returns in global equities and emerging markets but negative returns in many asset classes. That consistency of negative returns across asset classes is quite unusual. So, it is difficult for investors who have balanced portfolios of bonds and equities. The combination of high interest rates and dollar shocks had a significant damaging impact on the investment markets. At the end of the year, there has been a renewed anxiety about prospects of global economy creating factors that caused episodic volatility in 2018.
How will 2019 be?
When we get into 2019, the question is, ‘Is the situation going to stay the same?’ I think the US economy is turning from being a leader, from outperformance on growth, inflation and interest rates to little more balanced. Strength in the US economy is diminishing and becoming more in line with the rest of the world. So, we call our 2019 investment outlook as ‘back to the reality’.
What we mean by that is, this situation of 2018 when dollar was appreciating so significantly driven by strong economic growth in the US versus more lacklustre growth in emerging markets where there was reversal in growth terms. That divergence is becoming more convergence of economic trends. We see global economic growth of around 3% in 2019. However, the current situation is a lot better than the sentiment around. Lots of investment strategists are quite pessimistic about the global political situation, prospects for profit and economic growth. I think those worries about recession and weak growth are misplaced.
Equity markets across the globe have been flashing warning signs. Is this an overreaction to slowing growth or a precursor of imminent recession?
Many of the emerging markets that are considered risky and uncertain have actually been safe havens. Markets like India and Mexico have outperformed significantly compared to other advanced markets in December. Notion of risk has changed. The mistake which most global investors make is that they consider EMs (emerging markets) are permanently risky but that is not the case. What happens is that the nature of riskiness of a particular asset class is partly about economic prospects, fundamentals around profits, inflation, political situation and growth outlook. Also, partly it is about price investors are paying to get access to that market. In 2018, due to strong appreciation of the dollar, flows have moved out of EMs’ bonds and equities. So, these asset classes which are beaten down present scope of positive surprise for those contrarian investors who can brave this volatility. At this current juncture, it presents opportunity to be more focused on EMs. I don’t think there is recession. Economic trends indicate that there is a cyclical slowdown but nothing more severe.