Global economies are out of sync; 2024 will be a ‘year of contraction’

HSBC Asset Management said the U.S. will slump in the fourth quarter, followed by “a year of economic contraction, with Europe in recession in 2024”.

In its mid-year outlook, the British banking giant’s asset manager said recession warnings were “flashing red” in many economies, while fiscal and monetary policy were out of sync with stock and bond markets.

Joseph Little, global chief strategist at HSBC Asset Management, said that while parts of the economy have remained resilient so far, the balance of risks “suggests that recession risks are high now,” with Europe lagging behind the U.S., but the macro trajectory is generally “consistent” . “

“We’re already in a mild profit recession and corporate defaults are starting to spread,” Little said in a report seen by CNBC.

“The silver lining is that we expect high inflation to moderate relatively quickly. This will create an opportunity for policymakers to cut rates.”

Despite hawkish central bankers and apparent stickiness in inflation, especially at the core level, HSBC Asset Management expects the Fed to cut rates by the end of 2023, followed by the European Central Bank and Bank of England next year.

The Fed paused its monetary tightening cycle at its June meeting, keeping the target range for the federal funds rate at 5% to 5.25%, but signaled two further rate hikes are likely this year. Markets are pricing in a 25 percentage point increase in the federal funds rate this December, according to CME Group’s FedWatch tool.

HSBC’s Little acknowledged that central bankers will not be able to cut rates if inflation remains well above target, as is the case in many major economies, and said it was therefore important that a recession “doesn’t come too soon” and that lead to deflation.

“The coming recession scenario will be more like the recession of the early 90s, and our central scenario is a 1-2% decline in GDP,” Little added.

HSBC expects a recession in Western economies to lead to a “difficult and volatile market outlook” for two reasons.

“First, financial conditions are tightening rapidly, leading to a downturn in the credit cycle. Second, markets don’t appear to be reflecting a particularly bearish worldview,” Little said.

“In our view, for a market pricing in a ‘soft landing’, the next six months of news could be difficult to digest.”

Little said the recession wasn’t enough to “clear” all inflationary pressures from the system, so advanced economies faced “slightly higher inflation and interest rates over time.”

“As a result, we have a cautious overall view on portfolio risk and cyclicality. Interest rate exposures — especially the Treasury curve — are attractive at the front and middle of the curve,” Little said, adding , the firm believes “the value of some Eurobonds” as well.

“On credit, we are selective, focusing on higher quality investment grade credit rather than speculative investment grade credit. We are cautious on developed market equities.”

Support China and India

As China emerges from years of strict Covid-19 lockdown measures, HSBC believes high levels of domestic household savings should continue to support domestic demand, while problems in the property sector are bottoming out and the government’s fiscal efforts should create jobs.

Little also said that relatively low inflation — consumer prices rose 0.1 percent in May, a two-year monthly low, while the economy struggles to return to full speed — means further monetary easing is possible Yes, GDP growth “should easily exceed” the government’s modest target of 5% this year.

As a result, HSBC remains overweight in Chinese equities, and Little said, “diversification in Chinese equities should not be underestimated.”

“For example, value stocks in China and Asia have outperformed growth stocks. This is the opposite of developed equities,” he added.

Like China, India is the “major macro growth story in 2023,” Little said, as its economy has recovered strongly from the pandemic, supported by a recovery in consumer spending and a strong services sector.

“In India, the recent upside surprise in growth and downside surprise in inflation is creating some sort of ‘Goldilocks’ economic mix,” Little said.

“Government subsidies have also contributed to the improvement of corporate and bank balance sheets. At the same time, India’s structural long-term investment story remains intact.”