Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to the latest in our Market Talks podcast series.
Speaker: We will be featuring a variety of different topics and market developments that are currently trending globally and explore portfolio trends in 2024.
Speaker: What will the future hold?
Speaker: In today's episode, I'm joined by James Pomeroy, Global Economist at HSBC Global Research, and Max Kettner, Chief Multi-Asset Strategist at HSBC Global Research, who will discuss the macro landscape and the outlook for equities and bonds.
Speaker: After the break,
Speaker: I will discuss the latest QoIS trends for 2024 with Karim Traore, head of EMEA QoIS Solutions, markets and security services at HSBC.
Speaker: The landscape of quantitative investment strategies, or QIS, has evolved considerably over the last 10 years.
Speaker: It has gone from focusing on building strategies targeting a single solution for a number of different scenarios, to now focusing on creating strategies targeting specific risk premia.
Speaker: And that means understanding what risks markets are facing.
Speaker: So James, thank you so much for joining us.
Speaker: So could you provide us with an overview of the current macro landscape and why it differs from anything we've seen before?
Speaker: Well, we've obviously been through a period of great uncertainty in the global economy over the course of the last three years or so, and it's not getting any easier.
Speaker: The challenges are still out there for central banks, for companies, for individuals, and there's a huge amount of uncertainty.
Speaker: And that uncertainty is happening because there's a huge divergence in what's happening in the global economy.
Speaker: You've got certain areas that are doing pretty well.
Speaker: That's generally parts of the economy that involve services, just particularly discretionary services, so travel, tourism, recreation.
Speaker: That part of the global economy is doing pretty well.
Speaker: Wages are going up, employment's going up.
Speaker: That's helping to contribute to that sort of staying pretty robust.
Speaker: So that part of the economy looks pretty good.
Speaker: But there's a huge amount of challenges out there and they include mostly around the manufacturing sector.
Speaker: So we had this huge boom in global goods consumption during the height of the pandemic.
Speaker: That has slowed down quite dramatically.
Speaker: We've seen businesses build inventory and it's hard to see where those sort of new orders now are coming from.
Speaker: End demand's not strong.
Speaker: Those orders to fill up inventories aren't coming through.
Speaker: And global trade looks really, really weak.
Speaker: So you've got this sort of differentiation happening between global goods and global services.
Speaker: And that basically clouds that economic outlook.
Speaker: And then you've got to weigh that up against sort of this risk of higher interest rates, which central banks have responded to high inflation by taking interest rates up to four, five and higher percent, depending on where you are in the world.
Speaker: And that's basically now filtering through into various parts of the economy at different speeds.
Speaker: So some places you've seen it really clearly, some places you haven't seen it at all.
Speaker: And so there's this great uncertainty about the impact of high rates on the economy through the rest of 2023 and in 2024.
Speaker: And so you've got to weigh up this sort of relatively robust trend
Speaker: sort of services side of the economy, employment side of the economy at the moment, against this lingering risk of high rates hitting the economy.
Speaker: And so much of that impact is going to come down to what happens with inflation, which is looking slightly better.
Speaker: We have seen some better numbers in the US in particular, in Asia, in Latin America, but not yet in Europe.
Speaker: And so central banks are sort of torn between whether they can start to cut rates, which we've seen in some places like in Latin America,
Speaker: or whether they need to keep them high for longer, like we're likely to see in Europe.
Speaker: And that risk from higher rates is what's probably dominating a lot of people's minds at the moment, that those interest rates, particularly in Europe, maybe also in the US, staying higher for longer.
Speaker: Will that impact become more evident and does that weigh on global growth in 2024?
Speaker: Almost Dr. Jekyll and Mr. Hyde scenario, isn't it?
Speaker: Exactly.
Speaker: I mean, it really does depend on who you are.
Speaker: I mean, if you're a hotel operator, this is fantastic.
Speaker: Everyone's staying in hotels, everyone's spending on that side of the economy.
Speaker: If you're producing furniture, it's probably not great.
Speaker: And there's a sort of differentiation both by sector and also on who you are.
Speaker: You've got high income households who are doing fantastically well, who've got savings, who are now getting a return on those savings.
Speaker: You've got low income households who are still facing a massive cost of living squeeze from high
Speaker: higher energy prices, higher food prices, higher rental costs.
Speaker: So there's a big differentiation depending on who you are in the economy, what business you are, what level of income you've got, and where you are in the world as well, because Europe is still seeing much higher inflation rates than elsewhere.
Speaker: Thanks, James.
Speaker: So hopefully 2023 isn't over yet.
Speaker: So hopefully, as you mentioned, there will be some positive news by the end of 2023 and starting 2024.
Speaker: Thanks so much for joining us, James.
Speaker: Max, welcome.
Speaker: So we're speaking of the future, as I just mentioned, 2024.
Speaker: What is the outlook for equities and bonds in the next year or in the next quarters?
Speaker: Yeah, look, I guess what we have right now is still an environment that is very, very different to what we've been used to.
Speaker: We've been used to a world which is very, very sort of risk on, risk off, right?
Speaker: And we had that in 2010s, where essentially, you know, if things go risk on, you buy equities, you buy high yield credit, you buy risk assets in general.
Speaker: And then if you risk off, you buy bonds, right?
Speaker: So you have this very negative correlation and persistently negative correlation
Speaker: between sovereign bonds in particular and risk acids more broadly, whether that is high yield credit, whether it's equities, whether it's emerging market debt or emerging market equities or currencies.
Speaker: There's been this general negative correlation between risk acids and developed market sovereigns, which always sort of acted as a
Speaker: as a hedge or at least as a diversifier in the last 20, 30 years.
Speaker: And that started to change, right?
Speaker: The really, really challenging bit right now is that, you know, as we went into this year, as we went into 2023, a lot of people were saying, look, we're going to get this recession.
Speaker: We're going to get this big margin squeeze.
Speaker: particularly in the US.
Speaker: And that means we're going to move away from inflation concerns towards growth concerns.
Speaker: And if we move towards growth concerns, then that old risk on risk off world returns and bonds can finally, you know, act as a hedge again.
Speaker: That hasn't happened yet, right?
Speaker: We're still very, very worried about inflation is, you know, are we on the uptake of or a bit of an inflation bump, particularly in the US again, James has just said,
Speaker: In Europe, it's a bit more sticky.
Speaker: So we're not yet in that world, again, where it's risk on, risk off.
Speaker: But what we would classify much more as a Goldilocks world or a reverse Goldilocks world, right?
Speaker: In the Goldilocks world, which we were in for most of this year, which is broadly basically you're buying growth in equities, right?
Speaker: You're buying tech, for example, really the growth titles in equities, right?
Speaker: You're buying carry assets, emerging market debt, high yield credit, you're going, you know, you don't like volatility.
Speaker: Actually, volatility in the Goldilocks period is usually very, very subdued.
Speaker: Whereas, you know, the dollar really, really does quite badly in those environments.
Speaker: Whereas what we've seen now in September is the exact opposite, right?
Speaker: It's reverse Goldilocks where you're saying actually nothing works, right?
Speaker: Except for the dollar and holding cash in dollar, nothing works.
Speaker: Whether you're in sovereign bonds or in equities or in high yield or in IG or in emerging markets, it doesn't matter.
Speaker: Nothing works.
Speaker: So the outlook from here, I think, is still pretty similar that we are going to flip.
Speaker: in between those extremes, right?
Speaker: It is going to be much more challenging because before that, in particularly in the 2010s, the market timing wasn't that crucial, right?
Speaker: Because you could always sort of rely on that negative correlation between risk assets and fixed income.
Speaker: Whereas now, if we're flipping between those two extremes,
Speaker: Very likely the correlation between sovereign bonds and risk assets is not yet returning back to those negative levels that we have been accustomed to for such a long period.
Speaker: And that means market timing is much, much more important.
Speaker: Wow, Max.
Speaker: And when do you see this changing or you can't see anything yet?
Speaker: I can't see anything yet.
Speaker: What James has been outlining is very different, actually.
Speaker: And I think our economic outlook has been very, very different to consensus to what the street's been thinking for most of 2023.
Speaker: Bear in mind, we entered again, right?
Speaker: We entered 2023.
Speaker: And the huge consensus is we're going to get a big margin squeeze.
Speaker: We're going to get an earnings recession at least 15, 20 percent.
Speaker: We're going to get a recession in the first half and then the Fed will pivot dovish.
Speaker: And then in the second half, we're going to recovery.
Speaker: So according to the consensus opinion from 10, 11 months ago, we should now already be in the recovery and the recession should have happened three months ago.
Speaker: Obviously, none of that happened.
Speaker: The reality is that even the US economy overall is still much, much stronger.
Speaker: We're still having a lot of fiscal stimulus coming through.
Speaker: Overall, the economy in particular relative to those pretty gloomy consensus expectations
Speaker: is still doing much, much better than many people thought.
Speaker: So that makes it honestly very, very tricky to think, oh yeah, just give it six months and we're all going to focus on recession.
Speaker: And in six months, things are going to be absolutely grim.
Speaker: And then finally, that negative correlation will kick in again.
Speaker: That's very, very tricky to imagine.
Speaker: It's much more something perhaps in 18, 24 months down the line, not really something for the next six to 12 months.
Speaker: We live in interesting times, don't we?
Speaker: It's fascinating what you've been saying, Max.
Speaker: So thank you so much for both of you for joining.
Speaker: This was very helpful in understanding of what markets are facing today.
Speaker: And just a note to our listeners, you can get more research content by following the Macro Brief Podcast by HSBC Global Research.
Speaker: James, Max, thank you so much for joining this part of the session.
Speaker: And we are back.
Speaker: We are joined now by Karim Traore and he's going to tell us how our clients are dealing with the risks of today.
Speaker: So Karim, could we start by providing an overview of the challenges faced by our clients in their multi-asset allocation in light of the current macro environment?
Speaker: 2022 was challenging for both global equities and global bonds, and hence investors were not realizing the type of expected returns through the traditional diversification of the 60-40 portfolio.
Speaker: Then uncertainties and lack of market consensus on asset class performance during 2023 meant that a number of investors de-risked their portfolios and underperformed the benchmarks.
Speaker: The LDI crisis in the UK in fall last year has also highlighted liquidity risk.
Speaker: So it's important for investors to have in place a liquidity strategy alongside an investment strategy.
Speaker: Generally speaking, quantitative investment strategies, or QIS, are investments or hedging strategies that systematically enter into a long and or a short position in a given set of financial instruments.
Speaker: Stocks, options, futures, for example.
Speaker: They are driven by a predetermined set of rules, algorithms, which determine the quantities invested at any point in time.
Speaker: Specifically, multi-asset portfolios have undertaken a number of tasks.
Speaker: One, reduce non-diversification risk by looking for assets that can offer decorrelation at times where traditional asset classes do not, while at the same time not increasing liquidity risk.
Speaker: This would require thinking out of the box and looking for either market-neutral investments or liquid hidden assets derived from the traditional asset classes, but which have become assets in their own right.
Speaker: Volatility, correlation, term structure are examples.
Speaker: Second, manage drawdown risk within the equity portfolio through either an appropriate hedging overlay or a replacement by better suited equity premium strategies.
Speaker: Third, reduce duration risk within the bond allocation through either an appropriate hedging overlay or a partial replacement with a duration-neutral fixed income strategy.
Speaker: Fourth, and finally, increase the liquidity of the portfolio by exploring synthetic strategies versus physical assets and building asset allocations which show robustness in extreme market scenarios.
Speaker: This is really interesting, Karim.
Speaker: So thank you for this.
Speaker: Now, you spoke what QIS was and some of the portfolios, what the multi-asset portfolios have undertaken.
Speaker: Now, can you give an overview of the QIS landscape in Europe and the Middle East specifically?
Speaker: Sure.
Speaker: Absolutely, Gabriella.
Speaker: The landscape of quantitative investment strategies has considerably evolved over the last 10 years.
Speaker: Its constant evolution and adaptation to not only the macro environment, but also the needs of our partners and investors is a testimony of the resilience of QIS as a powerful investment and risk management tool for global investors.
Speaker: To give a few examples of the major changes that have happened, strategies have been simplified in their design in order to be as clear as possible in terms of what they intend to capture.
Speaker: While in the past, industry focused on building strategies aiming at hitting multiple birds with one stone, it has now shifted towards strategies targeting a very specific risk premium.
Speaker: Cost has generally decreased as liquidity of underlying instruments has increased and IT investments have been made in QIS platform infrastructure.
Speaker: QIS keeps expanding as new frontiers have opened up, allowing investors to get exposure to premiums that were not easily accessible in a cost-efficient and transparent way before.
Speaker: A lot more focus has been put in assisting investors in defining quantitatively their desired outcome.
Speaker: Finally, a lot more focus has also been put in taking into account the specific regulatory environments of our investors in the design of the strategies.
Speaker: Additionally, the platform nature of QIS has led it to be used by investors in new ways which can better fit their operational constraints, constantly bridging the gap between IP generation and outsourcing of executions.
Speaker: Karim, thanks so much for this.
Speaker: So what role does quantitative strategies play in the context of this outlook?
Speaker: Yes, quantitative investment strategies represent a useful tool for investors, social investors in particular, to further adapt their investment and liquidity strategies to the current microcycle.
Speaker: Not only can they be used as a more efficient way to get exposure to traditional asset classes, but also QIS can provide multi-asset managers,
Speaker: with a way to extract non-traditional premia for diversification purpose.
Speaker: Some specific examples, extracting fixed income carry without being long bond, coming with the associated duration risk.
Speaker: Extracting equity premium embedded in the option markets, which can offer a less volatile way to extract performance from equity markets.
Speaker: Getting a sustainable exposure to diversifying premia, not only accessible using traditional asset classes.
Speaker: allowing investors to increase their portfolio liquidity by entering into those strategies in a synthetic format.
Speaker: Finally, building risk management overlays sitting alongside traditional investments and aiming at reducing drawdown risks.
Speaker: To conclude, due to the very flexible nature of operational robustness and constant creativity of quantitative investment strategies platform, they will continue to play a defining role in the future in helping our investors and partners in their investments and risk management.
Speaker: Thank you so much, James, Max, and Kareem.
Speaker: As a reminder, you can get more content from our award-winning research team by following the Macro Brief Podcast by HSBC Global Research.
Speaker: You can also access the Markets and Security Services talks at Apple and Spotify under the Global Viewpoint channel.
Speaker: Simply search for it in Apple Podcasts or Spotify or wherever you get your podcasts.
Speaker: I would like to thank you for listening to this edition in our series of Market Talks podcasts.
Speaker: We hope that you enjoyed learning more about portfolio trends in 2024.
Speaker: What will the future hold?
Speaker: Stay tuned for more from our podcasts as we explore more trends in the coming weeks.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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