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Two giant economies shift, run for equities: HSBC
Before the speech: In this Thursday, Dec
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Before the speech: In this Thursday, Dec. 3, 2015, file photo, Federal Reserve Chair Janet Yellen prepares to testify on Capitol Hill in Washington, before the Joint Economic Committee. The Federal Reserve raised its key interest rate in mid-December from record lows and signaled the likelihood of four more hikes in 2016. Yet as Yellen addresses Congress on Wednesday, Feb. 10, 2016, turbulent markets, global weakness and slowdowns in key sectors are expected to lead the Fed to raise rates fewer than four times this year, if at all. (AP Photo/Jacquelyn Martin, File) (AP Photo/Jacquelyn Martin, File)
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span class="inline inline-center">Before the speech: In this Thursday, Dec. 3, 2015, file photo, Federal Reserve Chair Janet Yellen prepares to testify on Capitol Hill in Washington, before the Joint Economic Committee. The Federal Reserve raised its key interest rate in mid-December from record lows and signaled the likelihood of four more hikes in 2016. Yet as Yellen addresses Congress on Wednesday, Feb. 10, 2016, turbulent markets, global weakness and slowdowns in key sectors are expected to lead the Fed to raise rates fewer than four times this year, if at all. (AP Photo/Jacquelyn Martin, File)
The world's two biggest economies, China and the US, have undergone opposite forms of transformation, opening the chance for investors to profit from the equities market while avoiding the negatively affected-bond markets in developing countries, HSBC says.
Both countries are trying to improve their economies. However the supporting data is still showing uncertainties. China is close to deflation, which may lead to sluggish domestic demand in the future, while the strong US dollar may erode competitiveness in US manufacturing exports.
According to HSBC research, China has experienced market turmoil amid its transformation from a production-driven economy to a consumption-based economy. The US on the other hand has chosen to shift position from consumption-based to a production-based economy which also led to market turmoil.
Since the US raised its benchmark interest rates from record lows in December, the economic landscape has become clouded by falling stock markets, global weakness and sharply lower energy prices.
'There will be a chance for equities to grow higher compared to bonds and currencies. Investors have to stay diversified to manage the volatility in order to reach the long-term return,' said HSBC Asia Pacific chief investment officer Bill Maldonado on Thursday.
On the other hand, HSBC warned, investors needed to carefully trade Indonesian dollar-denominated bonds, as a correction is likely to happen in the market this year when US investors redeem their investments to buy US assets providing higher yields.
"As for currencies, we expect the strong US dollar trend to be sustained in the coming months, but it will be stabilized or turn around this year. So, look for buying opportunities in Asian currencies upon any meaningful sell-offs," HSBC Asia-Pacific fixed income CIO Cecilia Chan said, suggesting the addition of Indonesian sovereign bonds into portfolios.
Lower exports
In the last five years, China's exports have lost their domination of its economy. At the moment, China's producers are focusing on making more value-added products for the domestic market rather than creating export-oriented cheap products. The shift, temporarily, has created turmoil in the capital markets.
"There is a chance of foreign firms tapping into the Chinese domestic market. Despite the turmoil in the market, the fiscal condition is still strong. The chance for a soft landing with GDP growth of more than 6 percent is still high," said HSBC Asia Pacific regional head of mid-market enterprises, Tim Evans.
One of the important keys is e-commerce which, quoting China's 12th five-year economic plan (2011-2015), aimed at making China a global e-commerce leader. Retail e-commerce sales recorded compounded annual growth of 40 percent in 2013-2015.
HSBC sees an opposing transformation currently undergoing in the US, as the Fed has expressed plans to increase interest rates if the economic indicators show good signs. It would then attract capital'that previously flew out during quantitative easing'back to the country.
"The US economy remains on track as the unemployment rate falls to long-term forecast levels, and there will be further increases in the Fed's Fund Rate," Evans said.
HSBC predicted the Fed rate would be increased by 50 bps in the March 2016. (ags)
